Why Is Disney Stock Trading So Cheap?

Walt Disney stock (NYSE:DIS) has been a weak performer this year, falling by over 23% since early January, as concerns of a recession mount following the slew of tariffs imposed by U.S. President Donald Trump. That said,  Disney’s valuation is attractive with the stock trading at just about 16x consensus FY’25 earnings – not a big price to pay for a company with an iconic content library and a streaming business that’s on the verge of a turnaround. That said, there are risks as well.

Fundamentals: some positives, some negatives

• Walt Disney has seen its top line grow at an average rate of 8.3% over the last three years, although growth slowed to just about 4% over the trailing 12 months.
• Moreover, consensus projects that top line will grow by just 3% this fiscal year as the experiences business, which includes theme parks and cruises, is expected to see a slowdown.
• Disney’s valuation looks attractive. The stock trades at a mere 16x FY’25 consensus earnings and just about 14x estimated FY’26 earnings.
• Disney’s profitability remains weak, with its operating margin standing at 14.1%, only slightly above the S&P 500’s 13.1%, despite Disney’s vast scale.
• Financial stability is also a bit of a concern. Debt stood at $45 billion, with a moderate debt-to-equity ratio of 29.3%. Cash reserves are also relatively sparse, with a cash-to-assets ratio of just 2.8%.

Opportunities: Streaming momentum builds

• Direct-to-Consumer segment has the potential for a considerable upside. Over Q1, revenue was up 9% year-over-year to $6.1 billion.
• Operating income stood at $293 million, a sharp turnaround from a loss of $138 million in the prior-year quarter, driven by cost improvements and stronger pricing.
• Subscriber adds have slowed down a bit of late in line with the broader industry. Hulu saw a 3% sequential increase in total subscribers to 53.6 million over the last quarter, while Disney+ U.S. and Canada gained 1%.
• ARPU trends remained positive. Disney+ U.S. and Canada’s ARPU rose 4% sequentially to $7.99, while international ARPU increased 6% to $7.19, driven by pricing increases and growing advertising contributions.
• The company is taking a page out of the Netflix playbook by pushing Ad-supported tiers, which now account for half of U.S. Disney+ subscribers, and paid account sharing, which rolled out in the U.S. in September 2024 to reduce password sharing among members.
• Disney’s vast intellectual property library – which includes iconic franchises such as Marvel and Star Wars, as well as Pixar and its legacy animation assets – also gives the company an edge, while big box office hits over the past year ensure a steady pipeline of high-quality content.

Tariff-driven recession risks

• New tariffs imposed by the Trump administration have been rattling the markets, and economists have raised the probability of a U.S. recession this year.
• Nearly all of Disney’s operations – ranging from theme parks to cruises to video streaming and TV advertising- are dependent on discretionary spending, which could take a hit during a recession.
• The tariffs could have a direct impact on Disney. CEO Bob Iger recently warned that steel tariffs could raise cruise ship construction costs while noting that reshoring manufacturing isn’t going to be quick and a lack of skilled labor potentially impacts the merchandising businesses.
• Then, there’s the stock itself. Disney stock underperforms the index in major downturns. COVID Crash (2020): DIS stock declined 42% vs. the S&P 500 which fell 34%; during the Inflation Shock of 2022, DIS stock fell 61% vs. the S&P 500’s 25% decline. If the markets witness another downturn, Disney stock might just fare worse.

Bottom Line

Disney stock looks cheap on a relative basis, but its weak financials and poor track record during downturns are a concern. That said, the company’s growing streaming momentum and content pipeline might reinforce long-term upside for patient investors willing to stomach near-term volatility. This supports our conclusion that DIS is a good stock to buy. While DIS stock looks promising, investing in a single stock can be risky. On the other hand, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year 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.

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