If you’re a news-feed scrolling warrior like me, you might be familiar with the image above. Though you may not have seen exactly the same thing, the message is the same: Disney has a lot of movies planned out in the coming years.
While Marvel fans may view this photo as just a list of movies to look forward to, I see this as Disney (NYSE:DIS) giving us a subtle message on how exactly all their earnings are planned out in the future (Maybe it’s part of their plan to give subtle hints to investors?).
Blame it on my impulsiveness, but I immediately invested in Disney’s stocks after seeing this image. Oh yes, I did that with no knowledge of either their fundamentals (PE/earnings) or technicals (oversold, etc.). I told myself that it would be almost impossible for me to lose money if I sold the stock say, 10 years later.
I dug deeper into the company’s fundamentals only after I traded, and discovered that its valuations are a little ahead of itself. Even with its lofty valuations, I still think Disney is fundamentally strong and a unique “hybrid” of growth and value to some extent.
I believe that there may be more to Disney, so let’s jump right into the specifics.
Why do we love Disney?
I believe each of us has a unique relationship with Disney and most of us would warm up at the thought of its famous characters like Mickey, Minnie etc. Disney has always been able to connect with millions of people over the years. I can’t really point a finger at it so just check this trailer for their Disney+ Singapore release.
If this video warmed you up to Disney, trust me they probably created something similar for almost every country in the world. So if we “feel it” here in SG, so do other customers in other locations.
From a customer’s perspective, I love how they communicate with their audience. And I love it even more from a shareholder’s perspective because I think being able to connect with customers significantly increases a company’s profitability.
Disney’s Magical Fundamantals
The magic needs to end somewhere, and some may think it ends when a company is trading at a PE ratio of 300.
While the PE ratio is not a one-stop solution to determine the valuation of a company, it does provide us with a very basic understanding of their valuation. In Disney’s case, their trading at a PE of 300 shows that it is indeed OVERVALUED (compared to the S&P PE of approx. 30). And this is something that they may never achieve even if we look “lightyears” ahead (no pun intended).
2 reasons why Disney is not overpriced
Having said that, I do believe that there are compelling reasons why Disney has been able to maintain its PE at such levels. Let’s take a look at some of them below:
1. Hybrid Stock
Disney has always been a media business, which makes it a value stock, traditionally. But after introducing Disney+, many investors are now viewing Disney as a growth stock. Investors are now starting to accept this since digitization accelerated due to Covid-19 and Disney+ may be the right vehicle that will drive earnings to the company.
Some may argue that Disney+ is simply a distribution platform and doesn’t provide solid content. But I would urge pessimists who believe this to refer to the photo at the start of this article.
In terms of revenue, we are seeing the Direct-To-Consumer & International segment growing steadily over the past three years, from $3.1 billion in 2018 to $16.97 billion in 2020. The increase looks healthy to me and is certainly something that has made a significant impact on their balance sheet.
2. Recovery Optimism
Looking at the chart above, we can see Parks, Experiences and Products is facing some trouble with the prolonged lockdowns due to Covid-19.
At the end of the first half of 2021, it looked as though the world heaved a sigh of relief as the pandemic seemed to be under control. However, the arrival of the Delta variant changed all of that and now we are seeing Covid cases increasing worldwide.
At such valuations, I believe investors are betting on the idea that the Parks, Experiences and Products segment will still recover in the near future. And when combined with the revenue from Direct-To-Consumer & International, it will result in even higher earnings for Disney.
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How did Disney’s Stock Perform in 2021?
In terms of technicals, Disney is indeed lagging behind the S&P, having traded sideways much of this year. While the S&P rose by about 20% since the start of 2021, Disney is pretty much back to where it started.
Since the company has been trading at a range of $170 to $190 in the past 6 months, with the stock barely reaching oversold levels (RSI on the Weekly), I would conclude that the bull trend is still true for Disney.
Investors should watch these levels closely as price movement out of this range will confirm the trend.
Does Disney deserve a spot in your portfolio?
Personally, I like their stock and I love all the content they offer.
I’m a huge Marvel fan and with the recent success of Shang-Chi, I believe that the demand for its films is still strong and we are far from seeing any sort of “superhero fatigue.” And with the Hawkeye series’ release due this festive season, I have another reason to keep my Disney subscription going.
If you don’t mind the valuations and you’re willing to HODL past infinity and beyond, then Disney’s magic just might surprise you.
