The S&P 500 and the Nasdaq Composite have rebounded by double-digit percentages this year, but not all the stocks in those indexes have seen the same level of return. There are still bargains to be found. Buying stocks below what they are intrinsically worth can sometimes lead to better returns than buying the latest hot stocks on Wall Street.
Two top consumer brands worth considering right now are Walt Disney (DIS +1.34%) and Sonos (SONO 3.35%). These companies serve burgeoning opportunities in entertainment and home audio. Here's why these two stocks are substantially undervalued.
NYSE: DIS
Key Data Points
1. Walt Disney
Share prices of Disney have fallen sharply and are underperforming the market's recovery this year, but Disney's entertainment properties are worth a lot more than what's implied in the company's current stock price.
It's understandable why the stock is down. Wall Street fears a recession, which puts the focus on Disney's escalating losses in its streaming services. The theme parks and media networks (including ABC and ESPN) are cash cows, but investments to support growth in Disney+ are seen by some as a handicap for the stock. In the most recent quarter, Disney reported over $1.2 billion in net profit -- but it would have earned more if not for the $659 million operating loss in the direct-to-consumer segment.
While traditional valuation metrics don't do Disney justice due to the company's lower profitability, there are clues that Disney stock is undervalued. Despite robust growth in Disney's streaming services, including Hulu and ESPN+, which now have 231 million subscribers, the stock is trading below 2019 levels when the company first unveiled Disney+.
A conservative valuation for Disney's parks, experiences, and products business, which generated $8.9 billion in operating income over the last year, would be $89 billion (using a conservative price-to-operating profit multiple of 10). That compares with Disney's current market cap of $163 billion. That means the market is valuing 231 million streaming subscribers, ABC, ESPN, and Disney's leading film studios at $74 billion -- which might fairly value the media networks alone, but leaves Disney+ and the rest valued at nothing.
The key catalyst to get the stock moving higher will be improving profits in the direct-to-consumer segment. Wall Street is worried that Disney may have to completely revamp its content production strategy to accomplish that, but the most important factor that will see Disney succeed is the timeless value of its iconic media properties. You almost can't put a value on the nearly-century-long legacy of the House of Mouse. Disney will be entertaining families for decades to come, making its sub-$100 share price right now a bargain.
NASDAQ: SONO
Key Data Points
2. Sonos
Sonos started over 20 years ago and is a leader in wireless, portable, and home theater speakers and other accessories. The company experienced strong growth through 2021, but the soft consumer spending environment last year put the brakes on its sales momentum. With sales falling over 23% year over year in the most recent quarter, it might not look like a good stock to buy right now, but Sonos is a leading brand that is still gaining share in a market with big tailwinds behind it.
The past year saw a very choppy consumer spending environment, which has impacted many retail brands, but this is a rare opportunity to scoop up bargains. Sonos stock fell 64% from its previous highs. However, the home audio market is expected to grow 10% per year to reach $90 billion by 2032.
While management is moving to reduce operating expenses to protect profitability while sales are down, the market is overlooking the opportunity in Sonos' new software-as-a-service offering for businesses. Sonos has partnerships with over 130 streaming content providers, which could play to its advantage in winning over new business.
Management plans for Sonos to enter other new categories, which is why executives believe the company is in the early innings of growth. Sonos products are in 14 million households, which is less than 10% of its addressable market in the company's core markets. And because a lot of the company's sales come from existing customers buying additional products to fill out their sound systems, new product categories can keep the company growing for many more years. Nearly half of Sonos households use only one product.
The long-term growth of the home audio market is a big opportunity for this premium brand. Until retail spending firms up, Sonos will likely continue to report weak sales in the near term, so investors should expect volatility in the share price. But the stock's forward price-to-earnings (P/E) ratio of 20 is a discount to the S&P 500 average P/E of 25, which is undervaluing its future growth.
