It's been a brutal year for Walt Disney (DIS -0.04%) stock. Shares have slid nearly 7% year to date, even as the S&P 500 has risen more than 16%.
Ouch.
But investors might be wondering whether this is one of those times where famed investor Warren Buffett's advice to be "greedy when others are fearful" holds true. After all, the stock is down 7% year to date and 26% over the last five years. This poor performance is in spite of the fact that Disney's trailing-12-month revenue has risen almost 50% during this period.
Let's take a closer look at what's going on with the business and the stock.
What's going on?
Shares of Walt Disney are down for a number of reasons. But one stands out above the rest: The company has struggled to convert its sales growth into profits, spooking investors. Indeed, Disney's trailing-12-month net income is down more than 82% over the last five years. Profits have been largely weighed down by the company's hefty spending on content as it builds out its direct-to-consumer streaming services to compete with Netflix and other players in the space and meet the changing demands of an evolving consumer. For the nine months ended Jul. 1, 2023, for example, Disney's direct-to-consumer business reported an operating loss of $2.2 billion.
Putting the company's content costs into perspective, management said in its most recent earnings call that it expected to spend a total of $27 billion on content in fiscal 2023 -- and this forecast includes lower-than-initially expected spending on produced content due to writers' and actors' strikes.
Is the stock a buy?
But there are reasons to be optimistic.
Fortunately, Disney's profitability will likely inflect in the coming years as the company's investments in bringing streaming services online, scaling them, rolling out advertising, and correctly pricing them fall into the rearview mirror. Management said in Disney's most recent quarterly earnings call that it expected its direct-to-consumer business to achieve profitability by the end of fiscal 2024. One key driver behind management's confidence in achieving this is the increasing advertising demand on its streaming services. But recent price increases for streaming services Disney+ and Hulu are bolstering profits, too. Of course, none of this would be possible without an impressive library of content -- an investment the company arguably had to make to create an enduring and compelling streaming service.
A likely inflection in profits in the coming years may be enough to make the stock a buy at its current price. Shares currently trade at just 16 times analysts' consensus forecast for Disney's fiscal 2024 non-GAAP earnings per share. With profit growth on the horizon, supported by enduring franchises, like Marvel, Star Wars, ESPN, and its namesake Walt Disney, the stock's valuation multiple will likely increase substantially as the company's investments in a transitionary period for the business start paying off.
This may be one of those times when the Oracle of Omaha's advice to buy into the fear makes sense. Sure, it will likely be rough sailing. There are risks that intensifying competition makes it more difficult than analysts anticipate for the company to grow its earnings substantially over the next five years. Further, the company is still in the middle of navigating the challenges associated with writers' and actors' strikes. But it's likely better to buy shares before the clouds have cleared than after profitability has inflected and the company's multiyear efforts to transition its business to a direct-to-consumer world are bearing fruit. By then, shares may have already priced in a more certain narrative.
