It's been a long three years for Walt Disney (DIS -0.12%) shareholders.
As recently as 2021, with COVID-19 raging and much of America stuck working and studying from home, Disney stock hit an all-time high near $190 a share as investors saw demand skyrocket for the company's new Disney+ streaming service. A series of movie flops, culture war kerfuffle, and the stubborn unprofitability of direct-to-consumer streaming, however, soon soured investors on Disney stock. Opening below $115 Monday, Disney shares are down nearly 40% from their peak -- but there's good news, too.
Loop Capital analyst Alan Gould just predicted Disney stock will return to $140 a share within a year, and return to a price last seen two years ago.
Is Disney stock a buy?
What makes Gould optimistic? As the analyst explains on StreetInsider.com, losses at Disney+ are moderating already. And Disney is cracking down on password sharing to grow revenue, bringing it "closer to breakeven." Consumers are more confident, too, which could bring new business to Disney's parks.
Best of all, Gould notes that Disney's going to start buying back shares.
In fact, Disney has announced $3 billion in share buybacks. And the company's generating $8 billion a year in positive free cash flow today, so it has plenty of cash with which to do that. My bigger concern is whether buying Disney stock is the right move...for Disney, and also for investors.
Here's the problem as I see it: First and foremost, Disney stock is not cheap. Even down 40% in three years, the stock trades for 26 times trailing free cash flow. Adjusted for debt, Disney's valuation rises to 31 times FCF.
These are not cheap valuations for a stock that grew revenue less than 1% last quarter, and that's probably going to grow free cash flow in the low-teens the next couple of years. Meanwhile, Disney's more pressing problem is its $40 billion in net debt. If Disney wants to make itself a more attractive investment, that's the problem it should tackle first of all.
