Once A Solid Investment, Disney Shares Now Face Increasing Headwinds
Vincent Martin | Apr 12, 2022 13:55
It's been quite a while since Disney (NYSE:DIS) stock was a good investment.
Over 1-, 3-, 5- and 10-year periods, shares of the entertainment giant have lagged the S&P 500 (though the decade-long underperformance admittedly is minimal). Including dividends, the stock has returned just 21% over the past five years, or roughly 4% annualized.
The simple explanation for the relative weakness focuses on two areas: streaming and its parks business.
Disney was simply late to streaming. The company allowed Netflix (NASDAQ:NFLX) to gain dominant market share; it wasn't until November 2019 that the company finally launched Disney+. The parks business, meanwhile, was hammered by restrictions related to the coronavirus pandemic, and only recently has regained its footing.
In addition, investors—and particularly bulls on Disney stock—too often ignore another key problem: Disney's media empire. Stagnant growth in that business has weighed on the stock price for years now. There's a strong possibility that pressure will continue in the future also.
The Importance of Television to Disney Stock/h2
Disney's television empire is vast. Domestically, the company controls Freeform, FX, the National Geographic channel (of which it owns 73%), A+E (a 50% stake) and ABC. Internationally, the company operates Disney, Fox, National Geographic, and Star.
The most important network globally, however, is its sports-focused ESPN. Particularly in the US, the sports network had one of the best business models in any market, not just media. cord-cutting ' trend is a clear threat to ESPN; in fact, the affiliate fees the network requires are part of the reason why cable and satellite fees have soared over time. Disney has launched ESPN+ to drive direct-to-consumer revenue; but the fees for that service are lower than the affiliate fees generated from cable, satellite, and virtual distributors like FuboTV (NYSE:FUBO).
Even if the streaming, parks, and studio businesses recover, there will be an offsetting headwind from the television businesses. The likes of ABC and FX face similar challenges, even if those challenges aren't nearly as material to the overall bottom line.
Can Disney Stock Recover?/h2
To be sure, a recovery outside of ESPN means Disney earnings are likely to grow over time, but that alone doesn't make Disney stock a buy.
After all, even down sharply from the highs, the stock already is pricing in growth. The consensus Wall Street estimate for fiscal 2023 (i.e., next year) EPS sits at $5.25. DIS stock trades at nearly 25x that figure.
It's going to take time for Disney to get back to past highs. After all, the most recent quarter outside of television was strong. Disney+ subscribers topped expectations. Management still sees the base potentially doubling, to 260 million, by the end of 2024. The parks business got back to profitability in fiscal Q1 as well.
Yet, Disney earned barely $1 per share in the quarter. It's on track to earn $4-plus this year. That's not enough. Much more in the way of growth is needed.
The political controversy in which the company finds itself in Florida is a potential near-term headwind, certainly. But assuming, as is likely, that the news cycle moves on, the long-term headwind from the TV business remains.
If ESPN, in particular, proves a drag on growth in coming years, it's going to be difficult for Disney to grow enough to support even this lower share price. It's hard to see how Disney keeps ESPN profits from falling. And in that scenario, even down 31% from the highs, DIS stock might not yet be cheap enough.
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