Walt Disney stock has underperformed this year, dropping more than 23% since early January, amid rising recession concerns driven by a wave of tariffs imposed by U.S. President Donald Trump. However, Disney’s valuation appears compelling, with the stock trading at roughly 16x consensus FY’25 earnings — a modest price for a company with a renowned content library and a streaming segment poised for a recovery. That said, there are some risks to consider.
Fundamentals: some positives, some negatives
- Walt Disney’s revenue has grown at an average annual rate of 8.3% over the past three years, although growth slowed to about 4% over the trailing 12 months.
- Consensus estimates suggest revenue will increase just 3% this fiscal year as the experiences segment — including theme parks and cruises — is expected to decelerate.
- Valuation-wise, the stock is attractively priced, trading at just 16x FY’25 consensus earnings and approximately 14x projected FY’26 earnings.
- Despite Disney’s large scale, profitability is soft. The company’s operating margin stands at 14.1%, only marginally higher than the S&P 500’s 13.1%.
- Financial stability is a mild concern. Debt totals $45 billion, with a moderate debt-to-equity ratio of 29.3%, while cash reserves are relatively low, with a cash-to-assets ratio of just 2.8%.
Opportunities: Streaming momentum builds
- The Direct-to-Consumer segment presents significant upside. In Q1, revenue rose 9% year-over-year to $6.1 billion.
- Operating income came in at $293 million, marking a sharp rebound from a $138 million loss in the same period last year, driven by cost efficiencies and stronger pricing.
- Subscriber growth has slowed, aligning with broader industry trends. Hulu subscribers increased 3% sequentially to 53.6 million, while Disney+ in the U.S. and Canada gained 1%.
- ARPU trends are favorable. Disney+ ARPU in the U.S. and Canada rose 4% sequentially to $7.99, while international ARPU climbed 6% to $7.19, aided by higher pricing and more advertising revenue.
- The company is adopting strategies similar to Netflix, expanding Ad-supported tiers — now making up half of U.S. Disney+ users — and introducing paid account sharing, which launched in the U.S. in September 2024 to combat password sharing.
- Disney’s vast IP portfolio — including major franchises like Marvel, Star Wars, Pixar, and classic animations — offers a strategic edge, while recent box office successes help maintain a strong content pipeline.
Tariff-driven recession risks
- The new tariffs introduced by the Trump administration have unsettled markets, with economists raising the likelihood of a U.S. recession this year.
- Most of Disney’s businesses — from theme parks and cruises to streaming and TV ads — rely on discretionary spending, which tends to contract during economic downturns.
- Tariffs may also directly affect Disney. CEO Bob Iger recently cautioned that steel tariffs could inflate cruise ship construction costs, and that reshoring production would be slow due to a shortage of skilled labor, impacting merchandising operations.
- The stock itself has a history of underperforming during downturns. During the 2020 COVID Crash, Disney shares fell 42% versus a 34% drop in the S&P 500. In the 2022 Inflation Shock, Disney stock plummeted 61% while the S&P 500 declined 25%. Should another downturn occur, Disney may again lag the broader market.
Bottom Line
Disney stock appears relatively inexpensive, though its fragile financials and historical underperformance in bear markets are notable concerns. Nonetheless, its expanding streaming segment and strong content slate may deliver long-term value for investors willing to endure short-term volatility. This underpins our view that DIS is a good stock to buy. Still, concentrating investment in a single stock can be risky. The Trefis High Quality Portfolio, which includes 30 stocks, has a history of consistently outperforming the S&P 500 over the last four years. Why? These stocks, collectively, offered higher returns with lower volatility compared to the index — a smoother ride, as seen in the HQ Portfolio performance metrics.
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