While the broader U.S. markets have recouped most of their 2022 losses, and the Nasdaq Composite ($NASX) is now up almost 33% for the year, some sectors have remained weak in 2023. In fact, some stocks are languishing near multi-year lows, even as markets hover not far from their all-time highs.
PayPal (PYPL), for instance, is trading at its lowest levels since 2017, while Walt Disney (DIS) is revisiting levels it last traded at back in 2014. Both of these stocks are in the red for 2023, and are among the notable underperformers in the S&P 500 Index ($SPX) - and while they face some real headwinds, I believe that both these stocks now have limited downside, and can deliver strong returns over the medium to long term for patient investors.
Why Has Disney Stock Fallen?
Let’s begin by understanding why Disney stock has fallen.
First, the company’s streaming growth has faltered, as it has lost subscribers for the last two quarters – and the linear TV business also continues to sag,as the industry is gradually losing market share to streaming. Plus, while its hugely profitable Parks business is generating handsome profits, markets are concerned about that segment’s outlook amid the slowing economy.
Disney hasn’t had a good year at the box office either in 2023, which is adding to the pessimism - and while the stock is higher today on news of a freshly resolved cable dispute with Charter Communications (CHTR), the ongoing Hollywood strike is not helping matters.
Last November, Disney even replaced its then-CEO Bob Chapek with his predecessor and long-time CEO, Bob Iger. However, the stock has continued to fall to new lows under Iger, despite his ambitious turnaround plan for the media and entertainment giant.
Disney Stock Looks Like a Good Buy Now
With its shares sagging near multi-year lows and markets bearish on the company’s short-term outlook, I believe Disney stock now has limited downside, and offers favorable risk-reward for long-term investors.
Disney is razor-focused on streaming profitability, and its streaming losses were $512 million in the most recent quarter – which, for context, is around a third of last year's peak. While it has lost streaming subscribers over the period, most of these were for the lower-priced Disney+ Hotstar. The company has also raised subscription prices, and is next looking to crack down on password sharing - a strategy that is working well for rival Netflix (NFLX) - and should help to improve earnings for its streaming business in the coming quarters.
Also, markets might not be fully appreciating the turnaround under Iger - where, among other initiatives, the company is targeting structural cost savings of $5.5 billion.
From a valuation perspective, Disney stock trades at a next-12-month (NTM) price-to-earnings (PE) multiple of 17.67x, which is the lowest since 2020 and is at a discount to the S&P 500’s multiples – which, incidentally, are above their historical averages.
As Disney’s cost-cutting efforts start to show in its bottom line and the streaming business turns profitable (which the company is targeting in its next fiscal year), I believe the stock can offer handsome returns for investors willing to be patient with this quality name.
What’s Driving Down PayPal Stock?
Like many fellow former “stay-at-home” winners, PayPal’s growth rates have tapered significantly. Its revenue growth was a mere 8.5% in 2022, down sharply from 20.7% in 2020 and 18.3% in 2021.
Its earnings also plummeted in 2022 amid margin compression - plus, the company faces rising competition from rivals like ApplePay, and slowing e-commerce growth is another pain point.
Why is PYPL a Beaten-Down Stock Worth Buying?
PayPal is among the most renowned fintech names with a strong network effect. I believe the stock is a buy now for the following reasons:
- PayPal’s growth is expected to stabilize, and analysts predict revenue growth of around 8.5% each in 2023 and 2024. Its earnings are expected to grow in double digits in both years as margin improvement efforts take shape.
- From a valuation perspective, PayPal stock trades at an NTM PE multiple of 11.5x, which is near all-time lows. The forward price-to-earnings-to-growth multiple is also below 1, which is yet another sign of its undervaluation.
- PayPal expects to repurchase around $5 billion worth of its shares in 2023. For context, that's about 7.5% of its market cap. The repurchases make perfect sense for the company, given its low valuations, and should help to lift per-share earnings.
PayPal is also revamping its C-suite, and last month announced that it has appointed Alex Chriss as its new CEO effective Sept. 27.
PayPal Stock Forecast
Wall Street analysts rate PYPL as a Moderate Buy. Of the 30 analysts covering the stock, 18 have a Strong Buy rating, while one analyst has a Moderate Buy rating. The remaining 11 have a Hold rating on the shares.
Meanwhile, it's notable that PayPal stock trades below the Street-low target price of $65. Its mean target price of $89.42 is a premium of over 44% to current levels, while the Street-high target price of $126 implies expectations for the stock to more than double.
Overall, while both Disney and PayPal are sagging near multi-year low price levels and may not see a near-term rebound, I believe both of these companies have a strong moat and look like great buys right now – especially for long-term investors looking to make a contrarian bet in markets.
On the date of publication, Mohit Oberoi had a position in: DIS , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
