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Is Disney Stock a Buy After Earnings?

With losses in its direct-to-consumer segment but Hulu integration on the way, here’s what we think of Disney stock.

Disney sign

Disney DIS released its fiscal second-quarter earnings report on May 10, 2023. Here’s Morningstar’s take on what to think of Disney’s earnings and stock.

Disney Stock at A Glance

What We Thought of Disney Earnings

Although Disney parks posted good growth on the top and bottom lines, overall it was a disappointing quarter for the company because of its direct-to-consumer subscriber losses.

While the DTC segment appears to be on its way to profitability by the end of fiscal 2024, in line with expectations, we think Disney needs to expand that customer base and drive stronger top-line growth to replace declining revenue from linear networks.

Disney’s plans for Hulu could help. While CEO Robert Iger has doubted the value of general entertainment content in the past, he recently announced that Hulu will be integrated into Disney+ in the U.S. market, which mirrors international versions. Disney believes that having one app will promote higher usage and increase advertising opportunities.

Disney Stock Price

stock price of disney for one year
Disney Stock Price from May 2022 to May 2023

Fair Value Estimate for Disney Stock

At a 4-star rating, Disney stock is undervalued compared with our fair value estimate.

Our updated $145 fair value estimate reflects slower subscriber growth and lower losses from streaming. We expect average annual top-line growth of 6% through fiscal 2027. We now project losses for the streaming segment to continue through fiscal 2024, declines for linear advertising over the next five years, and a continued decline in margins for linear networks.

We expect that fiscal 2023 admissions revenue will remain ahead of fiscal 2019, despite consumer worries about the economy and inflation. As a result of delayed movie premieres and theater closures, fiscal 2022 theatrical revenue rebounded to only about 40% of the fiscal 2019 level.

We estimate 12% average annual growth for the DTC segment, as we are modeling strong subscriber growth for Disney+ and Hulu along with further price increases. We now project that Disney-branded services will hit 235 million paid subscribers by the end of fiscal 2027, assuming a continued international rollout and improved penetration in the larger Western markets.

We believe the segment will post its first positive annual operating income in fiscal 2025. We project Disney’s overall operating margin will improve to 21% in fiscal 2027 from 8% in fiscal 2022, as the losses at the DTC segment turn to gains and ongoing margin improvements at the theme parks more than offset the margin decline at linear networks.

Read more about Disney’s fair value estimate.

Price/Fair Value for Disney

Disney price/fair value ratios from 2018-2023 with ratios over 1 indicating when the stock is overvalued while ratios below 1 indicate when the stock is undervalued.
Disney price/fair value ratios from 2018 to 2023, with ratios over 1 indicating when the stock is overvalued while ratios below 1 indicate when the stock is undervalued.

Economic Moat Rating

We assign Disney a wide economic moat rating. Its media networks segment and collection of branded businesses have demonstrated strong pricing power in the past decade. We believe the addition of the Fox FOX entertainment assets, acquired in 2019, will continue to help generate excess returns on capital despite operating in the increasingly competitive media and streaming marketplace.

Disney’s television networks remain important pieces in traditional pay-TV bundles. The firm’s network lineup provides distributors not only with general entertainment but also live sports at ESPN and news coverage at ABC—two categories that are keeping many subscribers in the pay-TV orbit. While we expect television subscribers to continue to decline annually, the underlying networks remain profitable, and the cash generated will continue to be reallocated to support Disney’s DTC efforts.

ESPN is the dominant player in U.S. sports entertainment. Its position and brand strength empower it to charge the highest subscriber fees of any cable network, generating durable profits. Disney also owns ABC, one of the four major U.S. national broadcast networks, along with affiliated TV stations in eight markets (including six of the top 10 markets).

The firm’s success at the theatrical box office used to depend heavily on Pixar Animation Studios. However, Disney now has six studios (Walt Disney Pictures, Marvel, Pixar, Lucasfilm, Walt Disney Animation, and 20th Century Studios) that can generate blockbuster films annually. With the incorporation of Fox, Disney now owns 14 of the 20 all-time highest-grossing films at the worldwide box office—10 of which have been released since 2015. The continued strength of the studios and media networks should help drive continued success for the firm’s DTC ambitions for Disney+, Hulu, and ESPN+.

Read more about Disney’s moat rating.

Risk and Uncertainty

Based on the competitive linear and streaming media markets Disney operates in, along with the level of advertising and parks revenue that is exposed to the economy and economic cycles, we believe a Morningstar Uncertainty Rating of High is more appropriate than Medium, as it better reflects the volatility we expect Disney investors will face relative to our global coverage. Disney’s results could suffer if the company cannot adapt to the changing media landscape. ESPN garners the highest affiliate fees of any basic cable channel, and decreased pay-TV penetration would slow revenue growth. Disney’s labor relations remain one of its largest environmental, social, and governance risks; the company and its subsidiaries have been subject to a number of lawsuits alleging racial and gender discrimination, sexual assault/harassment, and wage gaps/discrimination.

Read more about Disney’s risk and uncertainty.

DIS Stock Bulls Say

  • The parks and resorts segment should rebound strongly from the pandemic since families still view the parks as prime vacation destinations.
  • Disney+ has a long runway for growth both in the United States and internationally. The platform’s original series and its deep, constantly expanding library support that growth.
  • Although filmmaking is a hit-or-miss business, Disney’s popular franchises and characters reduce this volatility over time. Additionally, the firm’s annual slate generally does not rely on one big picture, reducing the downsides of any flops.

DIS Stock Bears Say

  • The business model for Disney’s media networks division depends on the continued growth of affiliate fees. Any slowdown in this growth as pay-TV subscribers continue to decline could tremendously harm profitability.
  • The streaming space is increasingly crowded. Disney may have to keep funding losses in this segment beyond fiscal 2024.
  • Developing mass-market hit programs can be unpredictable, especially as media fragmentation continues. The race to attract and retain talented creatives has been and will remain very competitive and expensive.

This article was compiled by Muskaan Hemrajani.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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