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Should Disney stock be on your shopping list?

  • Walt Disney shares are down 36% since the start of the year
  • Investors fear consumers will cut spending on entertainment if the economy falls into a prolonged recession
  • Despite these dangers, it’s hard to ignore the strength of Disney’s global franchise and the cash-generating power of its legacy businesses.

The world’s largest entertainment company, Walt Disney (NYSE:), has taken a severe beating amid this year’s market downturn. Shares of the Burbank, Calif. giant have fallen 36% in the past 12 months, significantly underperforming the benchmark.

There are growing signs that Disney is struggling with its video streaming service, which has become the centerpiece of CEO Bob Chapek’s growth strategy since its launch nearly two years ago.

In her latest report, Chief Financial Officer Christine McCarthy slashed Disney+’s growth forecast, saying she now expects a total subscriber range of 215-245 million by September 2024, down from the company’s previous forecast of 230 to 260 million subscribers.

The company also raised the prices of its streaming offerings and outlined plans for a new tier of ad-supported Disney+.

Additionally, the report made it clear that most of Disney’s current subscriber growth will come from international markets where margins are already tight, especially with hovering at 20-year highs.

Disney lost $1.1 billion in its direct-to-consumer segment last quarter, compared with a loss of $293 million a year earlier. Since Disney+ launched in late 2019, the segment has lost over $7 billion.

Diversified business model

Despite these challenges, it’s hard to ignore the strength of Disney’s global franchise and the cash-generating power of its legacy businesses. The Burbank, Calif.-based company has an unrivaled portfolio of assets that have endured numerous recessions and downturns, emerging stronger each time.

The latest evidence of this strength came during the pandemic when the company’s theme parks, movie theaters and resorts faced unprecedented challenges due to global shutdowns and stay-at-home orders. Now that the pandemic is behind us, Disney’s slot machine is back on track, benefiting from strong pent-up demand.

Sales for the Parks, Experiences and Products division, including Disneyland, Walt Disney World and four resorts in Europe and Asia, reached $7.4 billion for the quarter ending July 31, a record amount up from 70% compared to the previous year. The division posted profits of $2.2 billion for the quarter, up from $356 million a year ago.

DIS revenue growth

Source: InvestingPro

Disney’s diverse business model and the strength of its franchise is perhaps the biggest reason most Wall Street analysts are pricing the stock as a buy. In an Investing.com poll, about 80% of analysts rate Disney stock as a buy.

DIS Consensus Estimates

Source: Investing.com

In a note earlier this month, Morgan Stanley analysts said they see the entertainment giant’s parks segment generating the majority of free cash flow and earnings before interest, taxes, depreciation and amortization. Additionally, they expect Disney’s content assets to be “underpaid and undervalued.”

Conclusion

Disney shares, which are trading lower than before the pandemic, offer an attractive risk-reward proposition for long-term investors. Given the current uncertain economic environment, it’s hard to predict how low it may drop from here.

However, there is no doubt that Disney is a big company, and its stock will rally strongly once the market bottoms out. For these reasons, Disney is a safe bet to buy in this bear market, in my opinion.

Disclosure: As of this writing, the author does not own any Disney stock. The opinions expressed in this article are solely the opinion of the author and should not be taken as investment advice.