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Disney Has Challenges to Overcome, But Is Built to Succeed Long-Term

Disney (NYSE:DIS), the world-renowned entertainment conglomerate, has been creating beautiful memories for its millions of fans for almost a century. But DIS stock also carries the responsibility of satisfying company shareholders and man…

Disney (NYSE:DIS), the world-renowned entertainment conglomerate, has been creating beautiful memories for its millions of fans for almost a century. But DIS stock also carries the responsibility of satisfying company shareholders and managing expectations — especially through tough times. And lately, it hasn’t been carrying that responsibility as well as many investors would like.

Source: spiderman777 / Shutterstock.com

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That’s not to say this is a bad stock. DIS stock has been publicly listed since 1957 and has returned over 100,000% from the time when the company started trading at the New York Stock Exchange (NYSE). Its current market capitalization is $276 billion, down from the all-time high $366 billion. The large-cap heavyweight, is presently ranked as the 28th largest company globally.

Disney’s income derives from a variety of sources, such as: media and entertainment distribution, content sales and licensing, Disney parks, linear networks and direct to consumer retailing. The competitive landscape for Disney has been changing and growing along with its ever-expanding business plan. Competitors range from Netflix (NASDAQ:NFLX) to Fox (NASDAQ:FOX) to Comcast (NASDAQ:CMCSA).

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DIS Stock Earnings

A handful of sources are predicting a challenging 2022. But despite the bearish market outlook, DIS stock released its fiscal first-quarter earnings report earlier this month and managed to beat expectations.

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Revenues for Q1 2022 came at $21.8 billion an increase from $18.5 billion from the  previous quarter and from $16.24 billion for the same quarter a year ago. Earnings per share (EPS) also came in at $1.06 vs 63 cents expected. Free cash flow has flipped from positive to negative, from $1.5 billion in Q4 last year to -$1.1 billion in Q1 this year.

Disney+ added 11.8 million viewers in the last quarter, and the online streaming platform has now amassed a total of 129.8 million subscribers. The late-2019-launched streaming service also increased average revenue per customer (ARPC) in the U.S. and Canada, to $6.68 per month compared to $5.80 from one year ago. Streaming service diversification worked well for DIS stock during the pandemic due to stay-at-home consumers.

Disney+ subscriber growthSource: Stastista.com

Disney parks revenue grew massively to $7.2 billion, up from $5.5 billion from the previous quarter and roughly double the $3.6 billion from a year ago. International park guests are estimated to account for around 20% of the revenue, and Disney stated they still haven’t fully returned in pre-pandemic levels. Consumer products was the only income that fell. Income has dropped to $1.57 billion from $1.72 billion from the previous year.

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So, important metrics such as revenues, subscription growth and EPS have beaten Wall Street expectations for the latest DIS stock quarter. Disney (as well as Netflix) have an obvious pricing power advantage and a strong market presence. These companies can offer something that people want and is not easily replicated. DIS stock price is up around 4% post earnings, hovering near the $153 mark. The stock is -1% year to date (YTD) and -18% for last 12 months (LTM).

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Disney Did Not Beat the Market in the Last Five Years

Throughout its lifetime, DIS stock has gone through various and distinctive eras, but long-term company growth has been consistent. Nevertheless, since 2017, DIS stock has had 1.19% five-year monthly beta, essentially trading with 19% higher volatility than the market. At the same time, for the past five years DIS stock has been underperforming the market.

The chart below illustrates the five-year returns of the S&P 500 index vs DIS stock.

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five-year performance of the S&P 500 Index vs DIS stockSource: tradingview.com

Fundamentals are showing mixed/neutral signals. ChartMilll compares Disney to 82 industry peers and gives it a fundamentals rating of 5/10.

Despite mediocre fundamentals, the business is well diversified through its brick-and-mortar business and its online digital products. Total revenues indicate a rebound in consumer demand, and Disney management is trying to push the envelope. It seeks to evolve and grow by creating new products and diverse revenue streams like live sports and new content weekly on Disney+.

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Disney also has had a recent change in CEO, from Bob Iger to Bob Chapek, who will need some time to re-ignite the complicated Disney machine.

The chart below shows how the stock performed during global recessions since inception.

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how DIS stock performed during global recessions since inception.Source: tradingview.com

Conclusion on DIS Stock

Its financial results keep bouncing back and forth between “good” and “could-be-better” fiscal quarters and the company has to address its free cash flow. DIS stock is facing a mountain of challenges, most of them being market wide systemic-risks. When the whole economy is down, or GDP is contracting, it is hard for single stocks to grow market capitalization and generate alpha.

DIS stock has to beat expectations in a market like this, not just match them, in order to sustain its valuation.

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The real question for DIS stock is: how will the company handle this difficult period?

Management has to find effective strategies to deal with inflation, decreasing consumer spending power, increasing cost of capital, supply chain issues and on top of that, with the pandemic. All of the aforementioned factors are directly correlated with one or more parts of the Disney business.

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I foresee Disney to continue trading at current beta levels, and I expect the stock to keep underperforming the market for the foreseeable future. Yet, I believe in the long term, Disney stock should be able to hit targets and move towards the right direction consistently and progressively. The company has the history, the DNA and the fanbase to excel.

On the date of publication, Jonathan Tang held a LONG position in DIS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Jonathan Tang has gained extensive experience in the financial services industry in London. He has completed valuable projects for companies such as Bloomberg, London Stock Exchange Group and FactSet. He holds a master’s degree in Investment & Risk Finance and has completed an MBA course at the London School of Economics. Jonathan has a passion for fintechs that democratize investing, stock market and public equities, ETFs, start-ups and real estate. 

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