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Disney: No Margin of Safety at Current Price

Walt Disney (DIS) or, fully, The Walt Disney Company, hardly needs any introduction. In short, though, the company’s diversified entertainment operations span across media networks, parks, experiences, and products, Studio Entertainment.

Last year, the company announced a strategic reorganization of its media
and entertainment businesses to stimulate the growth of its direct-to-consumer strategy. The company is now focused on developing and producing content that will be distributed across all of its traditional channels, but most importantly, through its relatively new streaming service, Disney+. Along with these plans (and weakness in its parks division as a result of COVID-19), Disney cut its dividend last year. (See Walt Disney stock charts on TipRanks)

On the one hand, investors remain excited about Disney’s streaming platform, which due to the company’s humongous content catalog, could be leveraged to expand massively on a global scale. On the other, with capital returns missing from the equation, investors face a limited margin of safety. If the company’s profitability growth lags the current expectations, it’s not unlikely that current investors will find themselves exposed to an inflated valuation multiple.

Disney+ is a Big Winner

Disney+ is, without a doubt, a big winner for the company. It now counts more than 116 million subscribers, which were accumulated within just 1.5 years. The service is beating projections, earning exciting reviews for its content, and in general, highlighting management’s swift and excellent execution.

Disney+ is not only compounding subscribers at a swift pace, however. Impressively, Disney+ is dangerously closing the gap on Netflix. It is now estimated that by 2024, Disney+ is likely to have surpassed Netflix in total subs, which is utterly bonkers considering that Netflix has been growing its subscriber base for years. Disney+ is not a kids’ channel, nor does it have any content pipeline issues, and this becomes clearer with every quarter.

Future Profitability is Speculative

While I am excited about Disney+’s prospects, I remain a bit wary regarding the company’s profitability, which seems to be a bit hard to predict. Keep in mind that COVID-19 severely impacted the company’s parks segment as well as theater revenues. The company reported increased losses at Disney+ last quarter as well, driven by higher programming and production, marketing, and technology costs. For this reason, net income remains at razor-thin levels. The company made just $918 million last quarter on $17 billion in revenues.

Now, as the platform scales and Disney’s other operations return to normality, it’s safe to say that the bottom line will eventually expand. That said, the stock’s rally following Disney+’s success may be overblown. Disney is expected to post EPS of $2.13 for the year, which is then expected to considerably grow to $4.30 in FY2022. This implies a P/E of around 35 on FY2022’s net income, which in my view, is a steep price to pay for the business, despite the streaming platform’s growth.

Sure, Disney+ has grown fast, but with more than 100 million users already, growth will eventually slow down in a couple of years. Further, this is not a pure-streaming play. This multiple includes the parks and the rest of Disney’s assets which don’t deserve such a premium in any case, in my opinion.

Walt Disney Website Traffic

According to TipRanks’ Website Traffic Tool, total visits on all devices are down 1.98%. Stock price have moved nearly in tandem with that.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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