The Force is with Disney (DIS) stock this year.
DIS stock is up nearly 10% year-to-date at a time when the broader market is wallowing in a loss.
Indeed, Disney stock shredded the S&P 500 throughout the bull market. Since March 2009, DIS shares are up more than 500%, compared to a 192% gain for the broader market.
Much of the recent giddiness surrounding Disney stock is related to the Dec. 18 release of Star Wars: The Force Awakens. That alone represents a risk for DIS stock, but, as we’ll see, there are other problems as well.
From the Star Wars run-up to secular changes in the cable industry, Disney stock faces both short- and long-term obstacles.
After all, tectonic shifts in the media landscape are only accelerating, and they threaten some of Disney’s most important assets.
And on a stock-specific level, DIS stock has some characteristics that make it look like a relatively big risk in a rocky market.
Before you pile into Disney stock on the Star Wars hype, please consider these three headwinds for its future.
Disney Stock Risks
Star Wars Hype Too High? There are a couple of worrisome things about the lift the famous film franchise is giving DIS stock.
First, investors need to be mindful of the market’s propensity to “buy the rumor, sell the news.” Hey, it happens — and that could make for an ugly December for Disney stock.
The other concern is that — as hard as it may be to believe — Star Wars could actually disappoint.
Oh, there’s no doubt the movie will do monster business at the box office, but the market doesn’t care about that. All it cares about is how the film performs against expectations. If the expectation bar is set too high, DIS stock will stumble even as Star Wars brings in billions.
Cable TV Is Unraveling: Pretty much every media company got whacked in early August when the market woke up to the reality that the current cable TV model is coming apart.
Disney stock lost more than 9% Aug. 4 to Aug. 5, while fellow television giants faced the same thing — Time Warner (TWX) lost about 9%, Comcast (CMCSA, CMCSK) fell 4.7% and 21st Century Fox (FOXA) dropped 7%.
DIS was the proximate cause of the selloff, thanks to a disappointment on the revenue front. While revenues and earnings both improved year-over-year, and while the bottom line beat expectations, revenues of $13.1 billion fell just shy of estimates for $13.23 billion. The company also slashed its outlook for profits in the cable business.
The number of customers who want to cut the cord or opt for so-called skinny bundles of cable service represents an increasing threat to media companies.
With DIS receiving about half its profits from its ESPN empire, it is highly captive to such trends.
Risk-Reward: Unless you’re a chart watcher who’s buying a stock because of its upward price momentum, it’s usually not a good idea to buy when the price is high.
DIS stock is off sharply from a record high set in early August, but it has hardly collapsed. As mentioned, it’s having a remarkably strong year.
The flip side of that is the high price has made the valuation less than compelling. DIS stock trades at more than 18.5 times forward earnings — significantly higher than its five-year average of about 17%.
Bottom Line
In the immediate future, the Star Wars premium is at risk if the first of the sequels doesn’t deliver as planned. Longer term, valuation has a way of catching up to a stock.
Lastly, DIS has a high beta. That means it’s more volatile than the S&P 500 and has tendency to underperform in down markets.
Putting your money with the mouse is simply risky right now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
