Key Points
- Disney shares are consolidating around these ranges amid a new announcement to consolidate the streaming and entertainment space.
- There is a 'more than likely' deal on the table in which Disney would end up owning 100% of Hulu, merging it with its Disney+ streaming platform.
- This activist investor agrees that there is a proper disconnect between today's stock price and the company's inherent value.
- Analysts are targeting double-digit upside potential, reiterating that this fundamental valuation metric is near a decade-low.
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Shares of Walt Disney NYSE: DIS are trading at one of their lowest valuations since 2026 (excluding COVID-19 adverse effects) after a two-year downtrend that started on March 2021; CEO Bob Iger is looking to turn things around and revive the stock price into new highs. The Disney chart is consolidating around today's prices, forming a robust range between the $90-$100 per share range. As sellers exhaust and new fundamental drivers arise, new activist investors are in for one bullish ride.
After seeing some declines and loss of revenue within their streaming business, Disney management has taken measures to recharge the brand's online presence and a market share in the streaming industry. Despite Disney stock being considered 'stable' or 'boring' due to its low volatility, analysts today point to price targets that would imply a move in magnitudes similar to post-pandemic rallies.
The Move to Consolidate
CEO Bob Iger has pointed to renewed interest to amplify Disney's footprint in the entertainment and streaming space; acting on this vision has yielded a 'More than likely' transaction in which Comcast NASDAQ: CMCSA has agreed to sell its Hulu stake to Disney. During a May tenth call with analysts, Bob Iger revealed his plan for users who currently pay for Disney+ and Hulu platforms. In the new combine, users can now access Disney+, ESPN+, and Hulu for only $10.99 per month. This transaction will significantly increase Disney's market share of consumer eyeballs across various verticals regarding content.
Comcast owns approximately one-third of Hulu, while Disney owns the remaining sixty-six percent. Comcast will have the option to sell its stake by early 2024, by which date it is relatively sure that a sale will be realized. Of course, no deal is ever set in stone, so Disney could still choose to sell all of Hulu to Comcast or other buyers at an attractive enough premium. However, it would be difficult for Disney's board and shareholders to digest the loss of the newly launched Disney+ and Hulu combined platforms. Nonetheless, witnessing a bidding war between the two media giants would be interesting.
Within its second quarter 2023 earnings presentation, Disney management breaks down the subscriber trend for its streaming platforms. While subscribers grew overall from 45.6 million in the second quarter of 2022 to finishing a year later at 48.2 million, the company reports a total loss of four million subscribers in India. The loss within the region can be attributed to Disney+ losing its streaming rights for the Indian Premier League cricket schedules. Despite losing 300,000 subscribers in North America due to increased subscription prices on December 2022, the total active monthly user count is still growing as a showcase of the company's loyal user base and pricing power.
Value Gap
Many value investors follow the 'Moat' principle taught by Warren Buffett, where a moat signifies some defensive barrier allowing for pricing power and reducing the amount of competition. For example, some may say that Starbucks NASDAQ: SBUX owns a price moat since they can keep raising the price of a coffee, and people will still buy theirs rather than a competitor's cup. The same can be said of Disney's streaming pricing strategy, even more so after increased market share and content consolidation to a near-monopoly status.
This 'moat' value is often intangible, making it subjective for investors to place a price on. For starters, however, Disney analyst ratings suggest a 40% upside from today's prices and pending dividend payments be reinstalled once free cash flow is stabilized; investors are in for quite a party. Moreover, others, like activist investor Nelson Peltz, are beginning to recognize how valuable this moat may be. Peltz reportedly added to his Disney stake in the first quarter of 2023, implying that the value investor bought the stock between $90-$119, suggesting that investors can gain exposure at more attractive prices today. As an activist investor, Peltz had sought to gain a board seat and effect changes. However, he retired the idea once CEO Bob Iger took action on cost-cutting initiatives to boost margins and reinstall dividend payments amid free cash flow levels improvements.
From a value perspective, investors are witnessing Disney's book value being assigned a mere 1.7x multiple, marking its lowest valuation since 2011. During significant recessionary periods like 2008-2009, this multiple has found basement values between 1.0x and 1.5x; today's multiple would imply that sentiment toward Disney is comparable to investor sentiment during one of the worst economic crises in the United States. Logically, there is a disconnect between the stock price and its inherent value, so DIS stock deserves a place on every investor's watchlist.
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