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Walt Disney Company (DIS) investors are bound to be disappointed in 2023, as the stock is underperforming the S&P 500 Index ($SPX) by double digits on the year. While long-term shareholders should theoretically be forgiving of short-term underperformance, Disney’s lackluster price action has been almost chronic over the last decade, and earlier this year the stock fell to its lowest level since 2014.
Even as the Dow Jones Industrial Average ($DOWI) – of which Disney is a constituent – has risen to record highs, Disney shares have lost more than 10% of their value over the last five years.
Peltz Launches a Proxy Battle for Board Seats
Given the significant underperformance, Disney presented a “fertile ground” to activist investors, and Nelson Peltz has now entered into a proxy fight with the company, seeking two seats on the board. That said, Disney’s board hasn’t exactly turned a blind eye to its sagging stock; last November, CEO Bob Chapek was replaced with his predecessor Bob Iger – under whose previous term Disney shares rose an impressive 554%, over twice what the S&P 500 returned over the period.
So far, though, in Iger’s second stint as CEO, Disney stock hasn’t performed the way markets expected. While the stock soared after the company announced Iger's return, it has since pared those gains, and is now only marginally higher from the levels before he took over as the CEO.
As for Peltz, his record as an activist investor is mixed at best, and his “activism” has not translated into superior shareholder returns at many companies. And for investors, beyond the fight for that coveted boardroom seat is a company that has been missing the usual magic that both Disney customers, as well as markets, expect. Can Disney stock ever recover and go back up amid the multiple issues that it is facing? We’ll discuss in this article.
What’s Wrong with Disney Stock and Why Has It Been Falling?
There are multiple reasons why Disney stock has fallen from the peaks. These include perennial losses at its streaming division, a flurry of box office flops, and operational hiccups at its parks. The company’s operating profit growth has been anemic over the last decade – and so has its stock.
What Steps Is Disney Taking to Revive Its Fortunes?
Ever since he took over as the CEO, Iger has been trying to revive Disney’s fortunes, and is working to increase sales without compromising on profitability. The strategy is best reflected in the streaming business, where operating losses narrowed to $387 million in the fiscal fourth quarter of 2023 as compared to $1.4 billion in the corresponding quarter last year.
The company has further expanded the scope of cost cuts, and said that it is targeting structural cost savings of $7.5 billion – $2 billion higher than the previous forecast. Iger has also put the focus back on creativity, and is working to improve its perception among customers, as well as the investing community.
DIS is also looking to launch a direct-to-consumer platform for ESPN by 2025, and has already launched the sports gambling platform ESPN Bet in collaboration with Penn Entertainment (PENN), which could be another growth driver. Disney is also doubling down on its hugely profitable parks segment and has committed to invest $60 billion in the business over the next decade. These investments should help address some of the concerns about service and wait times that many visitors have flagged over the last couple of years.
However, the hard truth is that Disney shares have continued to sag despite all of these measures.
Disney Stock Forecast: Will the Stock Go Up?
Wall Street analysts have given Disney a consensus rating of “Moderate Buy.” Of the 26 analysts covering DIS shares, 17 rate it as a “Strong Buy,” and 2 more as a “Moderate Buy.” Six analysts rate DIS as a “Hold,” while 1 analyst has rated it as a “Strong Sell.” The stock’s mean target price of $108.33 is over 16% higher than the current price levels.
Speaking with CNBC, Michael Nathanson, founder partner of MoffetNathanson, said he believes that “The key to Disney from here is really about the streaming business.” He added that while Netflix (NFLX) is the market leader, there is “no number two” in the streaming industry.
Notably, Disney has changed its streaming strategy under Iger, and is pushing for profitable growth rather than just chasing subscriber growth. The company has increased prices and is targeting streaming profitability by the end of the current fiscal year. It has also announced the acquisition of the remaining stake in Hulu from Comcast (CMCSA), while at the same time, it is considering “strategic actions” for its loss-making streaming business in India.
I believe markets have been a little too harsh on Disney shares, and while the company faces some real challenges, its risk-reward looks quite attractive. While the current next-12-month price-to-earnings multiple of 21x looks reasonable, the stock should see a rerating as its streaming business becomes profitable and the cost cuts start reflecting in its bottom line.
On the date of publication, Mohit Oberoi had a position in: DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
