Disney Stock Has 2x Upside If It Rises To Pre-Inflation Shock Highs Of $202 Per Share

Disney stock currently trades at $92.50 per share, about 54% below its pre-inflation shock high of about $202 seen on March 8, 2021. The sell-off has been driven primarily by Disney’s streaming business, which faces multiple headwinds. While Disney has invested considerably into the business, it remains deeply lossmaking, with its subscriber count in recent quarters declining amid mounting competition and the loss of crucial cricket streaming rights in India. Disney also posted mixed results over Q4 FY’23. While revenue missed estimates, rising by 5% year-over-year to $21.24 billion, adjusted earnings came in better than expected at $0.82 per share. While Disney stock was trading at a low of about $84 back in December 2022, it recovered to about $110 by June 2023 following the return of Bob Iger as CEO. However, the settlement with Charter Communications
CHTR
– which will involve Disney removing smaller, underperforming channels from cable bundles – is having some impact on the stock.

Looking at a slightly longer term, DIS stock has suffered a sharp decline of 45% from levels of $180 in early January 2021 to around $95 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, DIS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -15% in 2021, -44% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 – indicating that DIS underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same 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. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DIS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Now, the stock could have considerable potential for gains if it recovers to 2021 levels. Returning to the pre-inflation shock level means that Disney stock will have to gain about 118% if the stock recovers from $92.5 currently to its pre-shock highs of $202 per share. While it’s possible that over time the stock may recover to those levels, driven in part by increasing interest in the stock from activist investors, we presently estimate Disney valuation to be around $113 per share, about 22% ahead of the current market price. While Disney stock is undervalued, we think that the upside for the company in the near term could be limited by slower subscriber growth on the streaming side due to mounting competition. Our detailed analysis of Disney’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen recently. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: An increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains on the cards.

In contrast, here’s how DIS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Disney and S&P 500 Performance During 2007-08 Crisis

DIS stock declined from nearly $29 in October 2007 to $17 in March 2009 (as the markets bottomed out), implying that the stock lost over 40% of its value through the drawdown. However, the stock rebounded strongly to over $32 by early 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach 1,124.

Disney Fundamentals Over Recent Years

Disney’s revenues have risen from around $65 billion in 2020 to about $89 billion over the last 12 months, as the company’s theme park business saw footfalls and average spending rebound as Covid-19 lockdowns were eased. Higher revenues from the streaming business have also contributed to topline growth. While the company posted a net loss of about $2.9 billion in 2020, as the theme park operations struggled amid the Covid-19 surge, net income picked up to $ 2.35 billion by FY’23.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, Disney stock has the potential for gains once fears of a potential recession are allayed.

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