Media and entertainment company The Walt Disney Company (DIS) recorded 2022 as the worst year since 1974 as it struggled with changing CEOs, the high cost of streaming, and other macro headwinds. Shares of DIS have declined 20% over the past six months and 30% over the past year. Amid continued macroeconomic turbulence, the stock is expected to plunge further.

In this piece, I have mentioned various reasons why it could be risky to invest in this entertainment stock.

DIS’ revenues increased 7.8% year-over-year to $23.51 billion for the first quarter of fiscal 2023. However, its total segment operating income declined 6.6% year-over-year to $3.04 billion. Also, the company’s EPS, excluding certain items, was $0.99, down 6.6% year-over-year.

The company’s linearTV and direct-to-consumer units struggled during the quarter. For the Disney Media and Entertainment Distribution segment, linear networks revenues decreased 5% year-over-year to $7.30 billion, and operating income declined 16.3% from the year-ago value to $1.26 billion.

DIS’ direct-to-consumer operating loss widened 77.6% year-over-year to $1.05 billion. The increase in operating loss was due to a higher loss at Disney+ and a decrease in results at Hulu.

As of December 31, 2022, DIS’ paid subscribers of Disney+ were 161.8 million, compared to 164.2 million as of October 1, 2022. A recent price hike for Disney’s streaming services likely led to a loss in Disney+ subscribers.

After CEO Bob Chapek left the company following DIS’ disappointing fourth-quarter results, Bob Iger returned to run the company in December 2022. Chapek had a short but bumpy tenure as the CEO and guided the company through the pandemic, one of the most challenging periods in its nearly 100-year history. But ultimately, DIS decided that its future would be better with Iger.

On February 8, 2023, DIS announced its plans to reorganize its three divisions: Entertainment, ESPN, and parts and experiences. The DIS also said it would cut 7,000 jobs from its workforce and slash $5.5 billion in costs, including $3 billion in content savings. This major corporate reorganization has been underway since Iger returned to the helm of Disney.

Robert A. Iger, DIS’ newly appointed CEO, said, “We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders.”

Here is what could shape DIS’ performance in the near term:

Deteriorating Financials

For the fiscal 2023 first quarter that ended December 31, 2022, DIS’ revenues grew 7.8% year-over-year to $23.51 billion. However, its costs and expenses increased 9.7% year-over-year to $21.52 billion. The company’s total segment operating income decreased 6.6% year-over-year to $3.04 billion. Also, its EPS, excluding certain items, came in at $0.99, down 6.6% year-over-year.

Furthermore, cash outflows for continuing operations increased 366% year-over-year to $974 million, while DIS’ free cash outflow was $2.16, up 81% year-over-year.

Low Profitability

DIS’ trailing 12-month gross profit margin of 33.40% is 32.7% lower than the industry average of 49.65%. Likewise, the stock’s trailing 12-month EBITDA margin of 14.10% is 24.9% lower than the industry average of 19.46%. Also, its trailing-12-month levered FCF margin of 5.75% is 27.2% lower than the 7.90% industry average.

In addition, DIS’ trailing 12-month ROCE, ROTC, and ROTA of 3.57%, 2.66%, and 1.64% stand out in contrast to the industry averages of 3.62%, 3.54%, and 1.32%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, DIS is currently trading at 22.43x, 45.4% higher than the industry average of 15.43x. The stock’s forward EV/Sales multiple of 2.48 is 31.2% higher than the industry average of 1.89. Moreover, its forward EV/EBITDA multiple of 14.18 is 66.9% higher than the industry average of 8.50.

Also, the stock’s forward EV/EBIT of 16.93x compares with the industry average of 15.91x. Its forward Price/Sales multiple of 1.89 is 58.1% higher than the industry average of 1.20.

POWR Ratings Reflect Weakness

DIS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DIS has a grade D for Value and Quality, consistent with its higher valuation and lower profitability relative to its peers.

In addition, DIS has a D grade for Momentum. The stock is currently trading below its 50-day and 200-day moving averages of $101.63 and $101.59, respectively, indicating a downtrend.

The stock is ranked #10 of 16 stocks in the F-rated Entertainment – Media Producers industry.

Beyond what has been discussed above, additional ratings for Growth, Stability, and Sentiment of DIS can be found here.

Bottom Line

DIS’ linear TV and direct-to-consumer units struggled during the first quarter of fiscal 2023. A price hike for Disney’s streaming services led to a significant loss in Disney+ subscribers for the quarter. Furthermore, analysts expect DIS’ EPS for the ongoing quarter (ending March 2023) to decline 8.1% year-over-year to $0.99.

With CEO Bob Iger back at the helm, DIS plans to make a “significant transformation” of its business by reducing expenses and reshaping the company around creativity. Despite the restructuring plans, the company’s near-term prospects look bleak.

The stock hit its 52-week low of $84.07 on December 28, 2022. It is expected to plunge further as the company struggles with high streaming expenses and declining discretionary consumer spending with a looming economic slowdown. Given DIS’ poor profitability, elevated valuation, and bleak growth prospects, it could be wise to avoid this entertainment stock now.

Stocks to Consider Instead of The Walt Disney Company (DIS)

The odds of DIS outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three entertainment stocks, which are rated A (Strong Buy) or B (Buy) instead:

Inspired Entertainment, Inc. (INSE)

PlayAGS, Inc. (AGS)

AMC Networks (AMCX)

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DIS shares were trading at $91.85 per share on Monday morning, down $1.72 (-1.84%). Year-to-date, DIS has gained 5.72%, versus a 0.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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