3. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holdings: 109
YTD Decline (As of November 9): 42.66%
Based in Los Angeles, California, The Walt Disney Co. (NYSE:DIS) is an American multinational mass media and entertainment conglomerate. Despite a particularly weak Q3 2022, Wall Street remains confident that the slump is due to macroeconomic pressures and not due to company-specific challenges. The Walt Disney Co. (NYSE:DIS) has voiced plans to increase the ad-free subscription to Disney+ to $10.99, up from $7.99. Furthermore, the company demands commendable brand loyalty and has a firm grip on the content streaming market, making the possibility of a rebound incredibly likely.
On November 9, UBS analyst John Hodulik lowered the price target on The Walt Disney Co. (NYSE:DIS) to $122 from $135, maintaining a Buy rating on the shares. The analyst points out that the company’s Q3 2022 earnings miss is largely attributable to a higher DTC dilution and weaker parks margins. Hodulik adds that although the current macroeconomic climate does pose significant challenges, The Walt Disney Co. (NYSE:DIS) still remains excellently leveraged to make a successful transition to a streaming future.
Here is what Third Point had to say about The Walt Disney Company’s (NYSE:DIS) long-term prospects in their Q3 2022 investor letter:
“As disclosed in our Q2 letter, we reinitiated a significant position in The Walt Disney Company (NYSE:DIS) when the company retested its COVID lows earlier this year. At the current price, Disney is trading for little more than the stand-alone value of its Parks business and a mere 15x ’24 “street” consensus. The company remains early in its Direct to Consumer (“DTC”) transition with a leading market position, and yet the current stock price ascribes negligible value to the streaming business. We believe this is due to questions around the terminal economics of streaming, given large losses being generated today at Disney (>$1 billion dollars last quarter) and stagnating margins at peers such as Netflix. On the last earnings call, management highlighted three items that could lead to an inflection in DTC profitability over the next 12 months: a 38% price increase for Disney+ in the US; moderating growth in cash content expense; and an advertising tier for Disney+ launching in two months that can drive additional ARPU given high demand for the Disney brand amongst advertisers.
While the company has guided to Disney+ achieving breakeven sometime within the fiscal year ending September 2024, the valuation suggests the market remains skeptical. Disney only trades at ~14x the $7 in earnings generated prior to the Fox acquisition, which implies investors don’t expect earnings to meaningfully exceed this figure in the coming years. Hence, the first value driver we highlighted in our last letter is the opportunity for management to optimize Disney’s cost base to drive earnings growth. We believe Disney has ample means to rationalize costs across its operating platform and deliver targeted content for home viewing that does not entail the same cost structure of exclusive theatrical releases…” (Click here to view the full text)
