Surged More Than 16% in a Week, Is Disney Stock Finally a Buy?

The Walt Disney Company's stock price surged over 16% last week, fueled by a better-than-expected fiscal fourth-quarter earnings report released last Thursday. This impressive rally highlights the market's optimistic response to Disney's financial results and its future growth plans, aiding a significant recovery in its market capitalization from prior lows. The question now is: can this momentum sustain? Let's dive into Disney's fundamentals and technical price movements to uncover the clues.

Following Disney's earnings announcement, the stock put on a show of its own, breaking out of a pennant pattern—a classic bullish signal. Adding drama to the performance, this breakout was backed by above-average trading volume and capital inflows, hinting at strong applause (and buying) from institutional investors.

Note: Disney's stock saw five days of net inflows.(Check out Capital Trend function from moomoo)

According to Investtech, the stage is set with key resistance levels at $123 and $137 while a sturdy support base stands at $96 and $85, ready to catch any slips. In a plot twist, the stock has climbed out of its falling trend channel, setting the scene for a potential shift to a horizontal or even upward trajectory.

From Disney's earnings report, the company delivered an EPS of $1.14, beating expectations by $0.03 and reflecting a 6.28% increase from the same period last year. Revenue also impressed, rising 6.28% year-over-year to $22.6 billion, exceeding Q4 2023's $21.2 billion by $79.87 million. The company's Direct-to-Consumer segment and content pipeline were key highlights.

Disney+ Growth and Profitability: In Q4, Disney's direct-to-consumer segment turned profitable with $321 million in operating income, bouncing back from losses. This success came with a surge of 4.5 million new Disney+ subscribers, beating expectations. The ad-supported tier played a key role, attracting budget-conscious viewers and fueling growth.

ContentCreationSuccess: Disney's studios are on a roll, with hits likeInside Out 2andDeadpool & Wolverineeach raking in over $1 billion. The momentum isn't slowing, with major sequels likeMoana 2andAvataron the way, backed by Disney's powerhouse IP portfolio.

Investment in Parks and Experiences: Disney is going big on its Parks and Experiences, committing $60 billion over the next decade to double the capacity of its theme parks and cruise lines. This bold move aims to supercharge revenue growth and tap into the high-margin magic of immersive experiences.

While the company's fundamentals are improving, future concerns remain, particularly related to its debt expenses and challenges from market competition.

Disney's long-term debt balance stands at $39 billion, down from $47 billion five years ago. While the company has been steadily reducing its debt burden, the annual interest expense of nearly $2 billion continues to weigh on profitability and market capitalization. With an average interest rate of 4.5%, these costs are manageable but constrain Disney's ability to allocate capital toward growth initiatives or enhance shareholder returns. Given the ongoing need for high capital expenditures, especially with the $60 billion investment planned for parks and cruises, further leveraging could limit financial flexibility and place additional pressure on free cash flow, which is already expected to modestly decline in FY 2025.

In its Direct-to-Consumer (DTC) segment, Disney faces mounting competition in its core markets, with its average revenue per user (ARPU) lagging behind rivals like Netflix. While subscriber growth in the ad-supported tier has been encouraging, the increasing adoption of low-priced options presents challenges to long-term profitability. Additionally, linear networks, including ESPN, continue to erode, with subscription numbers dropping to 66 million in 2024 from 71 million in the prior year, reflecting a broader market shift away from traditional cable. Efforts to bolster ESPN's presence, such as entering the sports betting market through ESPNBet, have had limited success, and soaring sports rights costs (e.g., $2.6 billion for NBA rights) may limit the returns on these investments. Disney's ability to address these competitive pressures and sustain profitability improvements will be crucial to avoiding stagnation in its stock price.

Disney's favorable outlook relies on the success of its streaming transformation, a robust content pipeline, and long-term investments in its parks and experiences business. However, it faces risks including over-reliance on volatile revenue streams, weak free cash flow, and sustainability challenges in its traditional TV networks and streaming operations. While the company's recovery shows promise, it remains fragile, requiring structural changes and consistent strong performance to support an optimistic valuation.

Source: Investtech, Disney Earnings Report, moomoo