Since September 2024, Disney has been in a holding pattern, posting a small return of 5% while floating around $100.81. However, the stock is beating the S&P 500’s flat performance during that period.
Is now the time to buy Disney, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the strong relative performance, we don't have much confidence in Disney. Here are three reasons why we avoid DIS and a stock we'd rather own.
Why Do We Think Disney Will Underperform?
Founded by brothers Walt and Roy, Disney (NYSE:DIS) is a multinational entertainment conglomerate, renowned for its theme parks, movies, television networks, and merchandise.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Disney’s 4.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the consumer discretionary sector. 
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Disney’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 9.1% for the last 12 months will decrease to 8.1%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Disney historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
Disney falls short of our quality standards. Following its recent outperformance in a weaker market environment, the stock trades at 18.1× forward price-to-earnings (or $100.81 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Disney
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Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.