Has Disney’s stock price bottomed out or will it continue to fall? (NYSE: DIS)

Razvan

Thesis

The Walt Disney Company (NYSE: DIS) will release its FQ3’22 results on August 10. DIS stock has been mired in a downtrend since its bullish trap in March 2021 (significant rejection of buying momentum).

We posed in our previous update that the destruction of the DIS may soon be complete. However, DIS broke its May lows in July and established another lower support zone. Therefore, we revisited our thesis and analyzed whether the market could expect further digestion in DIS.

Our updated valuation model suggests further significant decline could still occur as the market appears to be demanding higher free cash flow (FCF) yields. Our analysis of the price action indicates that DIS may continue to face challenges in reversing its bearish flow.

Accordingly, we believe it is appropriate to revise our rating on Buy to Hold’s DIS, in view of its upcoming revenue card.

Can Disney Stock Recover?

Disney investors should be aware that the company’s business model is cyclical and could be significantly impacted by a severe economic downturn. Disney also warned in its (edited) docs:

A decline in economic activity, such as a recession or economic slowdown, in the United States and other parts of the world in which we operate may adversely affect demand for any of our operations, thereby reducing our revenues and profits. In addition, an increase in price levels in general, or price levels in a particular sector such as the energy sector, could lead to a shift in consumer demand away from the entertainment and consumer products we offer, which could also adversely affect our revenues and, at the same time, increase our costs. (Disney FQ2’22 10-Q)

DIS ad revenue by category

DIS ad revenue by category (Company records)

Therefore, the impact has already been felt at FQ2. Disney reported ad revenue of $2.08 billion, down from FQ1’s $2.84 billion. Moreover, the effect was generalized, as seen above. Advertising revenue made up 14.86% of Disney’s total revenue.

Therefore, we urge investors to pay attention to management’s comments on its advertising revenue. Coupled with its recent partnership with The Trade Desk (TTD) on performance advertising, Disney could offer significant insights into its advertising performance going forward.

Disney Media and Entertainment Revenue by Category

Disney Media and Entertainment Revenue by Category (Company records)

Additionally, we believe the impact of the recession and current inflation conditions could worsen churn in its media and entertainment category. Therefore, investors should pay close attention to management’s comments on churn, as the slowdown in the second quarter was also widespread.

Disney park attendance statistics %

Disney park attendance statistics % (Company records)

Nonetheless, Disney Parks have recovered well as hotel occupancy rates and guest spending continued to improve. However, the headwinds of recession and inflation could impact the pace of the recovery.

Therefore, we believe the market continued to beat DIS, given the potentially significant impact on all of its vital revenue categories. But, given the forward discounting mechanism of price action, the crucial question is whether these headwinds have priced in accordingly?

Has the price of Disney Stock bottomed out?

DIS Pricing Table (Monthly)

DIS Pricing Table (Monthly) (TradingView)

DIS’s long-term chart appears to be weakening, but it remains in an uptrend. Therefore, its bearish momentum could turn quite quickly if we see a significant price action pattern indicating a reversal of its bearish bias.

DIS Price Chart (Weekly)

DIS Price Chart (Weekly) (TradingView)

However, its medium-term chart indicates a stock deeply entrenched in a downtrend. Additionally, we did not see any downside trapping price action (significant rejection of selling momentum) that would stem its negative momentum.

Additionally, the market has fallen below its May lows as seen above. So while it appears to be consolidating, we still need to see more constructive price action.

Revised valuation model suggests more downside for DIS

Store SAY
Current market capitalization $176.16 billion
Hurdle rate [CAGR] 11%
Projection through CQ4’26
FCF yield required in CQ4’26 4.5%
TTM FCF margin assumed in CQ4’26 ten%
Implied TTM revenue by CQ4’26 $126.22 billion

DIS reverse cash flow valuation model. Data source: S&P Cap IQ, author

We have revised our required FCF return as we believe the market will likely demand higher returns to compensate for the previously discussed headwinds.

As a result, our TTM revenue target by CQ4’26 has increased significantly to $126.22 billion. However, we believe Disney could miss our revenue target based on the revised consensus estimates.

We posit that DIS might see other downsides, with an entry closer to its COVID bottom ($79) as more appropriate with a reasonable margin of safety.

Is the DIS action a buy, sell or hold?

We are revising our rating on DIS from Buy to Hold.

Given the increased headwinds of recession and the impact of inflation, we believe the market has increased its demand for higher FCF yields to offset the increased risks.

Our valuation model suggests that an entry point closer to its COVID low could offer investors more buffer as Disney’s recovery pace could be affected, which would likely impact its valuation.

Additionally, we have yet to see any constructive price action on its medium-term chart, although we believe a significant level of its premium has been digested significantly.

Karen J. Nelson