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Why Walt Disney Stock Crashed Today

By Rich Smith – Jan 14, 2022 at 12:52PM

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Guggenheim worries: Disney's parks business is still sick from the pandemic.

What happened

With the S&P 500 down 0.3% as of 12:05 p.m. ET Friday, and the Dow Jones Industrial Average down 0.8%, it's looking like this week is going to end on a low note. Part of that you can blame on Dow component stock Walt Disney (DIS -1.16%), which is taking a 3.7% tumble today.

And that, I fear, you can blame on Guggenheim.

A person wearing black mouse ears puts their hands to their face.

Image source: Getty Images.

So what

Who is Guggenheim, you ask? It's a privately owned investment manager based in Chicago. And more pertinently today, it's the stock shop that just downgraded Disney stock to neutral.

As reports, Guggenheim cut its rating on Disney stock this morning, and cut its price target on the shares by 20% to $165 apiece, citing a slower "pace of profit growth at the company's direct-to-consumer (DTC) and parks businesses, which is now below consensus through fiscal 2024."

Over-optimistic analysts could prove to be a headwind for Disney over the next few years, you see, if it takes the economy longer to recover from the pandemic than they hope. Citing "digital growth challenges, parks trend volatility and cost inflation," Guggenheim is of the opinion that a recovery in Disney's parks and recreation business will take longer than predicted. And as more analysts come around to that point of view, Guggenheim expects we'll see earnings predictions lowered, depressing investor enthusiasm for owning Disney stock.

Now what

Now, it's not all bad news.

Guggenheim notes that Disney's continued investment in direct-to-consumer streaming of movies and TV shows is also underappreciated by analysts. With Disney devoting $8 billion in investment in DTC this year, Guggenheim expects this business to keep growing, with as many as 10 million new subscribers to Disney+ coming online in the first quarter of 2022. The analyst also expects Disney+ to "approach breakeven by fiscal 2023."

Still, by and large, the analyst sees Disney as a whole earning sufficiently little that year to value the stock at 30 times next year's earnings, a premium valuation that leaves only about 10% room for upside from the stock's current $150 share price.

In Guggenheim's opinion, that's worth a neutral rating -- no more.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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