Disney Stock At A 90x Earnings Multiple: Time To Sell?

Disney stock has been trading at a very high trailing P/E multiple. Are market expectations set too high? MavenFlix explains why it may not be the time to sell DIS based on valuations.
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It is understandable that some may find Disney stock  (DIS) - Get Walt Disney Company Report expensive at first glance, even after shares traded sideways in the past six months. After all, a trailing P/E (earnings multiple) of 90 times based on fiscal 2020 adjusted EPS is very rich by most standards.

However, we at MavenFlix have a different view. Companies like Disney have had their stocks’ valuations distorted by the pandemic, leading to P/Es that look very different from what we had become used to seeing in the past.

Figure 1: Walt Disney castle.

Figure 1: Walt Disney castle.

(Read more from MavenFlix: Buy Disney Stock In September?)

Impact of the pandemic

When it comes to valuation multiples based on financial results of months ago, such as trailing P/E, the impact of the pandemic on the company's profits is baked into the analysis by default.

Even though Disney has entered the streaming race and thrived in it during the period of social distancing, the company’s main source of revenue is still parks and movie theaters. While this dynamic should slowly change in the coming years, today the company depends heavily on the physical presence of its customers.

Disney should soon benefit from the full opening of its parks and the return of movie theater audiences. The market has probably already priced these factors in, which in turn justify higher multiples. In fact, most Wall Street analysts offer a buy recommendation on DIS, with only a few suggesting minimal downside to share price in the coming months.

New business, new valuations

Also, with the successful entry of Disney in the streaming space, analysts may have started to see the company as one of the Big Tech giants, since Disney’s main competitors are now Netflix and Amazon. Within this segment, valuations tend to be higher, as the companies’ earnings growth and cash flows are backloaded into far-out years.

Despite having launched Disney+ only in 2019, Disney is already stealing market share away from companies that have been in the industry for a longer time, including Netflix. Disney is already one of the top contenders to win what is called “the streaming wars”.

(Read more from MavenFlix: Spotify Stock Jumped 10% In Late August: Will It Keep Going?)

In our view

Valuation multiple analysis is an important exercise, as it serves as a first filter and a quantitative assessment of the investment opportunity. However, the multiple should not be taken at face value, as context is a crucial element to be considered as well.

In the case of Disney stock, elevated trailing P/E reflects the impact of the pandemic on the company's profits last year and ignores the high-profit, high-growth opportunity in streaming. Look forward to fiscal 2025, for example, and the P/E of 21x looks much more compelling.

In our view, Disney remains a good investment that is not as expensive as it may seem to a few investors. The opportunity is probably a better match for long-term investors who are bullish on the streaming sector and on a post-pandemic “return to normal”.

Twitter speaks

Not long ago, we asked Twitter if Disney stock presented a buy-on-dip opportunity. Check out the poll below, and feel free to chime in!

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)