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Stock Analysis & Ideas

Disney Stock: Strong Upside Potential Despite Headwinds

Shares of the Walt Disney (NYSE: DIS) company have lost considerable value in the recent past and are trading close to a 52-week low. 

The erosion in value reflects the slowdown in paid subscriber growth rate, pressure on margins, and uncertainty related to the pandemic. 

Given the challenges, hedge funds have offloaded Disney stock over the past quarter. Per TipRanks’ Hedge Fund Trading Activity tool, hedge funds have a negative outlook on DIS stock and have sold 6.8 million shares in the last three months. 

What’s Next?

While Disney continues to face challenges, its recent Q1 performance impressed. Its revenues, earnings, and subscriptions came well ahead of the Street’s projection. The primary sticking points were the reacceleration in subscription growth (it added 11.8 million Disney+ subscribers in Q1) and recovery in the parks business. 

Disney’s strong content slate and entry into newer markets could drive its subscriber growth. Meanwhile, Disney doesn’t expect the growth to be linear. However, it projects subscriber growth to accelerate in the second half of the current fiscal. 

Management remained confident and reiterated the medium-term guidance of achieving 230-260 million paid Disney+ subscribers globally by the end of Fiscal 2024, which is encouraging.

In the domestic parks business, a strong demand pipeline and higher per-capita spending could continue to support revenues. 

While things are looking up for Disney, continued investments in content and uncertainty related to the pandemic remain a drag. 

Commenting on Disney’s prospects, Needham analyst Laura Martin sees it winning the streaming war in the long term. Further, Martin views Disney as a “metaverse beneficiary.” However, the analyst has a Hold recommendation on DIS stock.

Martin stated that “we prefer to remain on the sidelines until we reach peak streaming spending and begin a long ramp of improving ROICs from DIS’s streaming investments.” 

Bottom Line

Positive trends in the parks business and acceleration in net subscriber additions are positives. However, near-term headwinds, uncertainty related to the variants of the coronavirus, and tough year-over-year comparisons in Q2 are a concern. 

Nevertheless, Wall Street is bullish about DIS stock. It has a Strong Buy consensus rating based on 15 Buys and five Hold recommendations. Meanwhile, the average Walt Disney price target of $191.63 implies 38.8% upside potential from current levels. 

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