Stock markets have been falling recently, particularly in the US. But even so, I was surprised to see the Walt Disney (NYSE: DIS) share price fall by almost 7% on Friday. There was no company news on the day, and the next quarterly earnings isn’t released until 9 February.
However, it was the read-across from Netflix that weakened the Disney share price. Netflix, the mega-cap streaming service, released its fourth-quarter earnings, which caused the stock to tank by 22%. The primary reason for the fall was the company’s weak new subscriber Q1 forecast of 2.5m. It was much lower than the 5.7m that analysts expected.
This is where Disney comes in. The company is growing its own streaming service called Disney+. So if Netflix is struggling for new subscribers, Disney+ may be too. But is a 7% fall in the Disney share price really warranted based on Netflix’s forecasts? I’m going to take a look to see if this has presented me with a buying opportunity.
The bull case
Disney has a major ingredient I look for in an investment: an economic moat. Essentially, this is a competitive advantage that makes it harder for competitors to take market share. It can also be thought of as a barrier to entry.
Disney’s economic moat comes from its characters and stories it has built over decades. There’s only one Mickey Mouse, after all. And nowadays Disney also owns brands Star Wars, Marvel and Pixar.
Before the pandemic, Disney was also able to generate a double-digit operating margin and return on its equity. These are the kinds of financial metrics I look for when investing. To me, it represents the strength of Disney’s business, derived from its economic moat.
The bear case
Disney’s business was greatly impacted by the pandemic. It generates a significant proportion of its revenue from its theme parks, which were shut down during lockdowns. The company said its wider Parks, Experiences and Products division suffered $3.5bn in lost operating income due to the closures in one quarter alone. A new strain of Covid cannot be ruled out completely, so this remains a key risk for Disney’s business.
The company is also still in recovery from the pandemic. Net income is forecast to be $5.9bn for fiscal 2022 (the 12 months to 2 October 2022). In fiscal 2019 (so pre-Covid), net income was a much higher $11bn. Analysts are attributing the lower profit guidance to a contraction of margins due to inflation and increased operating costs.
This brings me to the current valuation. Disney’s share price has fallen by 21% over one year. However, the stock is still valued on a forward price-to-earnings (P/E) ratio of 34. Before the March 2020 Covid-related stock market crash, Disney was trading on a P/E of 20. Therefore, the stock still looks richly valued, even after the share price decline.
Should I buy at this Disney share price?
I do think Disney is a quality company with a strong economic moat. It’s a stock I’ve owned before, and would buy again, depending on the balance of risk-to-reward.
However today, I think there’s further downside risk in the share price. The valuation still looks rich, and profits aren’t expected to reach pre-pandemic levels until at least fiscal 2024. I’m keeping it high on my watchlist for now.
Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
