Walt Disney (NYSE:DIS) stock had been consolidating for years near the $100 mark. Last quarter, though, Disney stock finally broke out, as DIS has been delivering on various fronts. As a result, the owners of DIS stock are now looking toward the future, rather than at the rear-view mirror.
Disney’s success has also brought DIS stock to the attention of many new investors who are considering a position in the name. Let’s have a look at some pros and cons of Disney stock.
Streaming Into the Future
The first pro of Disney stock is the company’s foray into streaming. While DIS didn’t intend to end up controlling Hulu, that’s exactly what has happened. Hulu is not a close competitor of Netflix (NASDAQ:NFLX), although Hulu TV is a close competitor of Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube TV.
However, because of Disney’s ESPN+ streaming-sports platform and its upcoming streaming- entertainment platform, Disney+, bundling could propel Disney toward the top of the streaming world.
Consumers are clamoring for Disney+, as it will be a hit for those who have kids and are looking for top-line entertainment. As Friends and The Office —Netflix’s top two shows — leave the platform in 2020, and with Disney+ and other options coming online, bundling may help DIS win over customers looking for new or added services, boosting Disney stock price in the process.
Disney’s streaming business will not be profitable at first, but it should drive bottom-line gains for the company in the future. giving Disney stock price a positive catalyst.
Disney’s Diversified Lineup
As attractive as Netflix is, with its multi-billion free-cash flow deficit, it’s not quite as well-rounded as Disney.
Sarcasm aside, Disney’s studio, theme parks and networks have kept its bottom line humming right along. Its diversification is another pro to consider. Imagine how attractive Netflix stock would be if NFLX had other profitable businesses under its umbrella to help absorb the costs of building a world-leading content-streaming platform.
Meanwhile, Disney’s movie-studio business is pumping out blockbuster hit after blockbuster hit. Captain Marvel, Avengers, Aladdin and Toy Story 4 have all done incredibly well this year, while Lion King is set to hit theaters on July 19. And Frozen 2 and another Star Wars film are due to arrive later this year.
Add that to the company’s theme parks unit and its still-profitable TV networks , and Disney stock is supported by a very strong company.
Trading Disney Stock
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This third point is both a pro and a con.
Disney stock price spent years consolidating before bursting higher. In mid-2015, DIS stock hit $115. Almost four years later, in the first quarter of 2019, that level was still acting as resistance. It wasn’t until early April, when Disney unveiled its streaming plans, that Disney stock price rocketed above $115.
The stock consolidated nicely for a few months before resuming its climb, hitting a new all-time high on Friday.
If the markets can hold up, I would imagine sentiment towards DIS stock will remain quite bullish heading into Disney’s earnings in August. On the weekly chart above, you can see also see that the 10-week moving average is guiding DIS stock price higher. DIS stock looks poised to have continued momentum over the next 12 to 24 months, making it quite attractive from a technical perspective.
So what’s the negative aspect of the charts?
Many investors feel that they’ve missed the boat on Disney stock. After all, Disney stock price has gone from $110 to almost $145 very quickly, relative to the history of Disney stock price. And with the shares up more than 35% so far on the year. many investors feel like they’ve missed the bulk of the gains of DIS stock.
It’s true that the so-called “easy money” is gone now, and nothing short of a big pullback of DIS stock will bring it back. Those willing to wait out the turbulence of Disney stock and its potential sluggish action in the short- to intermediate-term should be rewarded, though.
Profit Growth and Valuation
This last section is a two-part con, consisting of growth and valuation.
While Disney has a great,diversified business and is propelling itself into the future with various streaming platforms, it doesn’t have the most attractive earnings growth or valuation.
The shares trade at about 22 times analysts’ consensus 2019 earnings per share estimate, which is far from nauseating on its own. But considering that average estimates call for a 7.6% decline in EPS this year and another 1% fall in 2020, some investors may feel that DIS stock’s valuation should not be above average levels. Further, the stock has a dividend yield of just 1.2%.
On the plus side, analysts, on average. are calling for 20% revenue growth this year and 18% growth in 2020. If Disney’s revenue is expected to grow so much, why are analysts predicting that its earnings will drop?
The answer is that building streaming platforms and investing in theme-park overhauls are not cheap But thanks to Disney’s popular movies and its other successful businesses, its ballooning revenue is largely offsetting those costs. Once its streaming business starts picking up, the company’s bottom line should accelerate, too.
While I love the company and its decision to invest in its longer-term future, it would be foolish not to point out the fact that its earnings are expected to decline and that its stock has an above-market valuation. That said, I am bullish overall on DIS stock.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL and DIS.
