Walt Disney (NYSE: DIS) is underperforming this year. After closing last week (June 1) below $100, the stock fell 7.6% in 2018. Netflix’s (NASDAQ: NFLX) 87% YTD performance in that time not only widens the market cap gap between the two companies but signals growth at Disney will not impress investors for a while.
Disney has two problems. First, it is poorly positioned for a seemingly exponential growth in online subscriptions Netflix is enjoying. Netflix double-downed on that position by taking on massive debt (its debt/equity is 1.63 times) so it may pay for the best content. Second, Disney’s cash cows are no longer guaranteed to deliver. The latest Star Wars movie was one too many than fans could absorb. Disney had to lower its opening weekend revenue forecast.
Disney must exercise care in the way it "milks" the Star Wars franchise. Unengaging side stories and a lack of pent-up demand will hurt ticket sales.
ESPN is still a headwind for Disney as viewership continues to drop. And more recently, the cancellation of ABC’s Roseanne will probably work out in the long run: ratings slipped towards the end of its finale, to 10.3 million viewers and a 2.5 rating.
Valuation
Wall Street on average has a $119 price target on Disney, while 12 fair value models set a $105, or a 5.6% upside. With the stock already at a discount, a drop below $100 will not last long.
