Shares of Walt Disney (DIS -0.85%) are trading down 8% over the last month, with most of the fall coming after the company's fiscal second-quarter earnings report on Wednesday. The House of Mouse reported a revenue increase of 13% year over year, with even stronger growth in profits.
What seemed to send the stock price lower was lower subscriber additions to the Disney+ streaming service than expected. Overall, the direct-to-consumer segment posted a 12% increase in revenue for the quarter, driven by recent price increases in the domestic market. But forcing customers to pay up via price increases might have caused some pressure on subscriber growth.
Nonetheless, Disney is moving in the right direction financially, which was CEO Bob Iger's top priority on returning to Disney in November to replace Bob Chapek. Revenue and profits were up in the quarter, as management remains on schedule to bring costs down.
With the stock trading not much above its 52-week low, here are three reasons investors can confidently buy the dip in Disney stock.
1. The Marvel Entertainment segment alone is estimated to be worth over $50 billion
Disney owns some of the most valuable entertainment properties in the world. One prime example is Marvel Entertainment.
Disney acquired Marvel and its content library of more than 5,000 characters in 2009 for $4 billion. Since that acquisition, Disney has generated multiples of that amount from revenue at the box office and elsewhere. In 2021, Forbes estimated the value of Marvel Entertainment at $53 billion, which is nearly a third of Disney's current market capitalization (share price times total shares outstanding) of $169 billion.
When you consider that there's a lot more value tied up in its Star Wars franchise, its theme parks and resorts, its numerous media networks (ESPN and ABC), Disney's legacy content, and consumer products as well, you begin to see what the markets are getting wrong about Disney stock. You don't need fancy formulas to figure out that Disney is selling significantly below its long-term worth right now.
2. Disney has lots of untapped advertising opportunity
Iger is in the process of unleashing Disney's profit potential following a few years of spending on streaming content. Disney's earnings and free cash flow were up substantially in the quarter, and more is on the way. "From movies to television, to sports, news, and our theme parks, we continue to deliver for consumers, while establishing a more efficient, coordinated, and streamlined approach to our operations," Iger said.
One opportunity to generate very profitable growth is advertising. Disney is preparing to bundle its Hulu content through Disney+, which management is excited about for the advertising growth potential. Disney already has 5,000 advertisers across streaming platforms.
"The truth is, we have only just begun to scratch the surface of what we can do with advertising on Disney+, and I'm incredibly bullish on our longer-term advertising positioning," Iger noted on the earnings call.
While the ad market remains weak, Disney is clearly laying the foundation during the downturn to drive significant growth in ad revenue over the next several years.
3. Disney plans to reinstate the dividend
A final reason to consider buying the stock now is the reinstatement of the dividend, which was suspended a few years ago to help cover operating losses during the pandemic. Iger said in February that management intended to ask the board to reinstate the dividend by the end of calendar 2023.
Management didn't provide any update on the latest earnings call about the dividend, but Disney's free cash flow more than doubled last quarter to almost $2 billion. With profitability improving, Disney should be able to afford a small dividend within the next year.
JPMorgan Chase investment analyst Philip Cusick expects the dividend to be $1 per share annually, which would put the dividend yield at just over 1% at the current share price of $93.
To sum up, the value of Disney's brands, catalysts in advertising, and resuming the dividend are good reasons to consider buying the stock on the dip. While the market is unpredictable in the near term, the stock should deliver compounding gains for many years from these lower share prices.
