Is now the time to buy Disney (NYSE:DIS) stock? With the launch of Disney+ in a few weeks, it may be tempting. But the streaming story likely will take years to play out for Disney stock.
While analysts anticipate the service will have mass appeal, the company is sacrificing short-term earnings growth in the meantime. The recent performance of DIS stock has reflected these concerns. Since Summer, shares have fallen from the $140 price level down to around $130/share. At the current valuation, the company remains richly priced.
Digging deep into projections, it may be too early to dive into DIS stock. Let’s take a closer look, and see why shares are not a compelling buy at the current price.
No Slam Dunk for Disney Stock
Expectations for Disney+ drive the DIS stock price. Wall Street assumes that the company’s rich library of content will outfox Netflix (NASDAQ:NFLX), AT&T’s (NYSE:T) WarnerMedia, and Comcast’s (NASDAQ:CMCSA) NBC Universal to take a commanding share of streaming hours.
Last year’s purchase of 21st Century Fox was the grand finale of a decade-long acquisition spree. Since 2009, Marvel, Lucasfilm, and finally 21st Century Fox fell into Disney’s hands. The company took “content is king” to the next level. Quite ironic, considering Sumner Redstone (who coined the phrase) saw his media empire of CBS (NYSE:CBS) and Viacom (NASDAQ:VIAB) dwarfed by the House of Mouse.
But can DIS parlay this menagerie of assets into greater profits and a higher stock price? The pivot to “direct-to-customer” (streaming) is part growth strategy, part adaptation. While cable television remains a cash cow for big media, its salad days are long past.
In last August’s conference call, Disney provided guidance suggesting a 10% decline in Media Network’s operating income for the quarter ending September 2019. It’s tough to see how the company will be able to counter the cord-cutting revolution, as its streaming efforts accelerate the trend.
In the meantime, Morgan Stanley’s Benjamin Swinburne projects streaming will be unprofitable until 2024. This means Disney stock may see earnings declines in the short-term, but the company’s other segments continue to perform well. Star Wars and Marvel Universe releases help sustain both box office and licensing revenue.
However, the company is firing on all cylinders. They have likely maximized the level of new content the market will bear. With this in mind, it seems tough to justify the current valuation of Disney stock.
Valuation: DIS Stock Remains Richly Priced
A small dip in the Disney stock prices does little to bring valuation lower. Shares continue to trade at a premium to the company’s big media peers. DIS has a forward price-to-earnings (forward P/E) ratio of 20, and an enterprise value/EBITDA (EV/EBITDA) ratio of 18.3.
Here are the valuation metrics for Disney’s peers:
AT&T: forward P/E of 15, EV/EBITDA of 8.4
CBS: forward P/E of 4.7, EV/EBITDA of 7.6
Comcast: forward P/E of 16, EV/EBITDA of 9.3
Netflix: forward P/E of 82, EV/EBITDA of 53
Viacom: forward P/E of 5.5, EV/EBITDA of 5.8
Granted, comparing Disney stock to AT&T and Comcast is not apples-to-apples. AT&T and CMCSA are telecommunications companies with media assets attached. But an 18x EBITDA multiple in still steep for a company with earnings growth issues.
As InvestorPlace’s Will Healy put it last week, Disney+ may be a “sell the news event” for Disney stock. The company’s partnership with Verizon provides a shot-in-the-arm in terms of early adoption. But it’s a long road until “direct-to-customer” is a cash cow for the Magic Kingdom.
A Solid Buy Down the Road
Buying Disney stock today may not be the best way to profit from the Disney+ catalyst. It will be years until the streaming division produces profits. Investors have time to enter the stock at a lower price. At the current valuation, shares are priced for perfection.
DIS also faces big competition from its big media peers. WarnerMedia’s HBO Max and NBC Universal’s Peacock will compete for streaming eyeballs. The streaming arms race marches forward. With it comes the secular decline of the cable networks business.
Remember that streaming is replacing an income stream more than it’s supplementing one. The jury’s still out whether streaming can produce a profit on par with television. With this in mind, today’s price may not be the ideal entry point for Disney stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned companies.