Is Disney stock a buy right now?

Shares of Walt Disney (NYSE:DIS) surged in the first quarter as the entertainment and media giant was the top performer among all stocks on the Dow Jones Industrial Average through Q1.

Disney stock reached a 52-week high of $122 per share on March 28, up by about 35% year to date. However, it has since fallen back about 16% to its current price of around $102 per share. Disney stock is still up 16% YTD but well off its late March/ early April highs.

As we head into the second half of the year, let’s take a closer look at the outlook for Disney — and if the stock a buy right now.

Winning the proxy fight

Disney’s rise in the first quarter was due to several factors, including solid earningsresults, gains in its struggling streaming business, a new venture for a sports-streaming service, and a victory of sorts in holding off a proxy challenge from activist investors, particularly hedge fund manager Nelson Peltz from Trian Partners.

Peltz had long been pushing for changes at Disney, mainly calling for expense reductions and improvements in the streaming business. Disney has made significant progress on both.

Now with the proxy fight in the past, investors have been hoping that Disney might enjoy easier sailing going forward, but that has not been the case.

Stock price drops from 52-week highs

After the company released its fiscal second-quarter earnings results on May 7, its stock tanked about 9%, tumbling to about $105 per share, and it kept dropping from there.

Disney posted another decent quarter that beat earnings estimates. However, its revenue was only up 1% year over year, and it had a net loss of 1 cent per share. Those lackluster numbers may have spooked investors, but if you look inside the numbers, it seems like an overreaction.

Disney’s adjusted EPS, which excludes goodwill impairments, was $1.21 per share, up 30% year over year. While the company’s overall revenue growth was muted, the direct-to-consumer (DTC) streaming business reported a $47 million operating profit. That streaming business is a critical business line and has been a major drag on Disney’s earnings for some time, as evidenced by the $587 million loss in the same quarter a year ago.

Overall, revenue from the DTC business increased 13% in the quarter to $5.6 billion, lifting the Entertainment division instead of dragging it down. Disney+ core subscribers grew by 6 million in the quarter.

On the other hand, Disney’s linear TV networks and films business struggled, with linear networks revenue down 8% to $2.8 billion and content sales/ licensing (a.k.a., the films business) revenue plunging 40% to $1.4 billion. The weakness in these two areas likely accounted for much of the drop in Disney’s stock price.

Is the market overreacting?

It is a bit of a head-scratcher that Disney’s stock price fell so sharply following that earnings release, given that the company raised its guidance for adjusted earnings growth for the full fiscal year. Specifically, Disney is now calling for 25% adjusted earnings growth, up from the previous guidance of 20% growth.

However, the stock-price drop may have been due to projections for “softer” results in the streaming business in fiscal Q3. Disney+ Hotstar, its Indian streaming affiliate, lost the streaming rights to cricket.

On the earnings call, Chief Financial Officer High Johnston said Disney did not expect Disney+ core subscriber growth in Q3. However, management did say they expect streaming to return to profitable growth in fiscal Q4 and be a “meaningful future growth driver for the company, with further improvements in profitability in fiscal 2025.

Deadpool three and inside Out two could boost revenue

Disney’s stock has been running a bit hot, and its P/E ratio skyrocketed, doubling over the past year to 111. Thus, a correction was due, and the valuation has come down into a better range. The forward P/E for Disney stock is now a reasonable 18, which is more in line with realistic earnings expectations.

The company could also see growth from upcoming films, as its first summer blockbuster, Kingdom of the Planet of the Apes, looks like a hit and is the fourth highest-grossing film so far in 2024. The firm also has high expectations for Inside Out 2, set to drop on June 14. It is expected to having the biggest opening weekend of the year so far with a projected $80 million to $85 million in box office revenue.

Then in July, Deadpool 3 is scheduled for release, and early ticket sales suggest it could be another winner for Disney.

A good time to buy Disney stock?

Overall, the May swoon for Disney stock looks overdone, as the company has cut expenses, moved its streaming business onto the road to profitability, and increased its free cash flow.

The high P/E ratio is a concern, but Disney’s earnings have been challenged during the massive expense reductions and restructuring. Meanwhile, its stock price spiked after the proxy fight. Going forward, the price should be more in line with actual earnings — thus the more reasonable forward P/E.

A strong summer box office, continued momentum on streaming, and the potential for growth with the upcoming sports-streaming venture could all give Disney a boost. However, I’m looking more at the back half of the year for Disney stock to spike again.

In the near term, the price could drop a bit more on a potentially lackluster June quarter, perhaps presenting a better buying opportunity.