Is This a Bad Sign for Walt Disney Stock?

An activist investor may have sold out at around the peak.

Nelson Peltz is out. The activist investor who was trying to turn Walt Disney (DIS 0.33%) around has reportedly sold his shares of the company for $120 apiece, earning a profit of approximately $1 billion on the entertainment stock. After losing a proxy fight earlier this year, Peltz looks to have given up on his quest to change the trajectory of the business.

But with Peltz claiming to see much more potential for Disney and its iconic brands and then selling out at just $120, should investors be worried? Whether he lost the proxy battle or not, the stock sale may suggest he didn’t see a whole lot more upside for Disney.

Why Peltz’s stock sale may not necessarily be a cause for alarm

Despite all the drama surrounding Peltz, Disney’s stock has managed to produce market-beating returns thus far in 2024; it’s up around 14%, which is better than the S&P 500‘s 11% return. At the end of the day, what may matter most to Peltz is coming away with a profit on his investment. And if he earned $1 billion, then regardless of whether he won the proxy fight, he still won in the end, taking away a large profit.

Selling out at $120 does, however, suggest that he may not have seen much more upside for Disney in the near term. But at that price point, the media stock would have been trading near its 52-week high. It may prove to be a shrewd move for the investor, especially with the economy potentially headed for a slowdown, which could impact the business in the near term.

Disney’s management still has a lot of work to do

With Peltz gone, Disney CEO Bob Iger can get back to focusing on the business and trying to get it growing, which hasn’t been easy lately. During the first three months of the year, revenue increased by just 1% to $22.1 billion. The company, however, projects that its adjusted earnings per share will rise by 25% for the fiscal year (ending in September).

A big concern in the past has been the viability and profitability of its streaming business. The good news is that last quarter, the company reported a $47 million profit in its direct-to-consumer segment. But on revenue of $5.6 billion, that works out to just a tiny margin of less than 1%. And when including ESPN+ in addition to Disney+ and Hulu, the overall streaming business slipped back into red ink, with a loss of $18 million. While that’s an improvement from a $659 million loss a year ago, it still highlights just how much more work is needed in that area of Disney’s operations.

One of the ways Disney can add value for investors is by strengthening its bottom line, and it plans to do that by focusing more on quality rather than quantity. Last month, the company announced that Pixar Animation Studios would be laying off 14% of its employees. And it will focus on theatrical releases (as opposed to short-form series that are designed for its Disney+ streaming service), which could lead to stronger financial results.

Should you buy Disney stock today?

Disney stock is trading at just 19 times projected future earnings (based on analysts’ expectations). That’s low compared to the S&P 500 average of 21. But with a lot of work still to do in improving its streaming segment and economic headwinds potentially impacting its core theme park business, I would hold off on investing in the stock just yet.

Regardless of whether Peltz is invested in the company or not, there are still many questions surrounding Disney, like what its future growth prospects will look like and how profitable its streaming business will be. And until there’s clarity about that, the safest option is to take a wait-and-see approach with the stock.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.

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