The S&P 500 might be in record territory, but not all businesses have benefited from the rally. In fact, there are some well-known companies out there that have struggled in spectacular fashion.
It might not be a surprise that The Walt Disney Company (NYSE: DIS) is one such entity. The business was decimated by the pandemic, had a leadership change, dealt with an activist investor, and now faces a difficult media landscape.
Shares are down 52% from their peak price (as of July 2), which was established in March 2021. But investors should play the long game here. I believe Disney is a growth stock that should be considered as a portfolio purchase right now.
Navigating a changing industry
Disney was once a thriving enterprise thanks mainly to the success of its linear channels, namely ABC and ESPN. They commanded huge fees from cable networks while also generating notable advertising sales. Barriers to entry were high, revenue was recurring, and margins were great.
Then streaming came along and completely changed how consumers get access to video entertainment. Disney is dealing with declining cable-TV subscribers as households cut the cord. This is difficult for shareholders to swallow, given just how lucrative the linear TV segment was.
Although Disney was late to the game when the Disney+ streaming service launched in November 2019, it has rapidly gained customers. As of March 30, the company’s non-sports, direct-to-consumer streaming operations, which include Disney+ (including Hotstar) and Hulu, had a total of 204 million subscribers. For what it’s worth, ESPN+ has 25 million customers.
However, I think Disney will be able to successfully handle the ongoing changes to the media landscape. That’s because it’s hard to argue that Disney+ won’t be one of the handful of top streaming services on the market when the dust settles. Its streaming operations are moving toward consistent profitability.
The management team, led by CEO Bob Iger, plans to launch a stand-alone ESPN streaming service in 2025. That’s another step in the right direction as far as sports are concerned. But what could really boost customer acquisition and lower churn would be to bundle all of its streaming services into one app. That could be the closest thing to a full-on cable-TV replacement the industry has seen.
At the end of the day, no company can match Disney’s intellectual property. Moreover, no business can match Disney’s ability to monetize this, whether it’s at the movie theater, on cable channels, on Disney+, at theme parks, or by selling consumer products. This is precisely what creates the company’s economic moat.
Selling at an attractive valuation
As of this writing, Disney stock trades at an EV-to-EBIT (enterprise value to earnings before interest and taxes) multiple of 34.7. This appears extremely expensive at first glance, but consider that the business is certainly posting below-normal profits these days as it ramps up the streaming division. I think it’s best to look at Disney’s segments individually to gain a clearer picture.
The Experiences segment raked in $33.6 billion in annualized revenue and $9.2 billion in annualized operating income in the fiscal 2024 second quarter (ended March 30). There’s growth potential in the years ahead with new attractions, incremental expansion, and new revenue opportunities. Plus, Disney not only has proven pricing power here, but the theme parks and consumer products are almost impossible for a rival to replicate.
One could argue that the Experiences segment alone could carry an EV-to-EBIT multiple of 20. That results in an EV of $184 billion, which isn’t far off from Disney’s current EV of $223 billion. What this means is that investors can get the entertainment and sports segments for about $40 billion.
And based on Disney’s still-profitable cable channels, coupled with the potential for its large streaming business to grow subscribers and earnings, one can safely assume that these divisions are worth significantly more than $40 billion. Consequently, Disney stock looks like a no-brainer buy for the patient investor.
Should you invest $1,000 in Walt Disney right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.
1 Growth Stock Down 52% to Buy Right Now was originally published by The Motley Fool
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