Can Disney Stock Rebound To $200?

Disney stock (NYSE:DIS) currently trades at $93 per share, about 53% below its pre-inflation peak of about $200, seen on March 8, 2021. Several factors have driven the sell-off. Disney’s streaming business has been experiencing slower subscriber growth and increasing competition. The linear TV business has also underperformed recently due to lower advertising and declining affiliate revenues in the domestic market. There are concerns in the theme park business as well. Although the business has been a solid performer post-Covid-19 reopening, the near-term outlook appears mixed as Disney anticipates higher costs and a normalization in attendance levels. Over Q3 FY’24, the parks business saw revenue increase by a mere 2% year-over-year to $8.4 billion, while operating profit fell 3%. While Disney stock hit a low of about $80 in October 2023, it has since recovered slightly after experiencing considerable volatility, as the streaming business – which Disney has invested considerably into in recent years – approaches profitability. 

Looking over the last three years, DIS stock has performed worse than the broader market. Returns for the stock were -15% in 2021, -44% in 2022, and 4% in 2023.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could DIS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Now, the stock could have considerable potential for gains if it recovers to 2021 levels. Returning to the pre-inflation shock level means that Disney stock will have to gain about 113% if the stock recovers from $93 currently to its pre-shock highs of about $200 per share. A couple of factors could drive Disney stock higher. Disney has been increasingly focusing on boosting profitability for its streaming business. Over Q3, Disney’s three flagship streaming services Disney+, Hulu, and ESPN+ reported about $47 million in operating profits, versus a loss of $512 million in the year-ago period. Given the largely fixed costs and limited marginal costs, streaming can become a big cash cow for Disney.  Although subscriber growth has been moderating, with U.S. and Canada subscriber adds for the last quarter coming in at just about 1 million, Disney is looking at ways to make more money off its existing subscriber base. Disney has been consistently increasing pricing for its services including Disney Plus, Hulu, and ESPN Plus. While Disney+ launched at $6.99 per month back in 2016, prices stand at $14 currently and are set to rise to $16. Disney has also embraced ad-supported plans, which could deliver higher average per-customer revenues, while also starting to crack down on password sharing. The company says that users who wish to share an account with someone outside of their household can add an extra member for $9.99 on the ad-free plan. This is very similar to the playbook that Netflix has used over the past two years, to considerable success. Netflix stock has grown almost 2.5x over the last two years.

However, we presently estimate Disney valuation to be around $116 per share, which is about 23% ahead of the current market price. While Disney stock is undervalued, we think that the upside for the company in the near term could be limited by a mixed economy and weaker consumer confidence which are likely to impact its parks business, which has been a big profit driver in recent years. Disney’s Experiences reporting segment, which includes theme parks and cruise liners, accounted for about 70% of the company’s total operating profit last year.  Our detailed analysis of Disney’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen recently. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: the Fed has kept interest rates unchanged to quell fears of a recession.
• September 2024: The Fed cut its benchmark rate by 0.5% and signaled more cuts coming this year.

In contrast, here’s how DIS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Disney and S&P 500 Performance During 2007-08 Crisis

DIS stock declined from nearly $29 in October 2007 to $17 in March 2009 (as the markets bottomed out), implying that the stock lost over 40% of its value through the drawdown. However, the stock rebounded strongly to over $32 by early 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

Disney Fundamentals Over Recent Years

Disney’s revenues have risen from around $65 billion in 2020 to about $89 billion over the last 12 months, as the company’s theme park business saw footfalls and average spending rebound as Covid-19 lockdowns were eased. Higher revenues from the streaming business have also contributed to top line growth. While the company posted a net loss of about $2.9 billion in 2020, as the theme park operations struggled amid the Covid-19 surge, net income picked up to $2.35 billion by FY’23. 

Conclusion

With the Fed’s monetary easing now underway, and Disney’s streaming business turning around, the stock has the potential for gains.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

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[1] Returns as of 9/26/2024
[2] Cumulative total returns since the end of 2016

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