Should you invest in Disney stock as it explores options to spin off ESPN?

By: Motiur Rahman
Motiur Rahman
Md Motiur enjoys researching how companies are solving challenges the world will face over the coming decades. In his… read more.
on Oct 15, 2021
  • Disney is reportedly exploring options to spin off ESPN.
  • DIS has made significant acquisitions in recent years to boost its competitive edge in the streaming market.
  • Disney is shifting from linear TV programming to the subscription-based model for higher profit margins.

On Friday Walt Disney Co. (NYSE:DIS) shares edged higher 1.33% after news emerged suggesting the company is exploring options to spin off its world-leading sports network ESPN. According to a report published by Dylan Byers on Pluck, Disney CEO, Bob Chapek has asked some of his closest deputies to explore a strategic rationale for spinning off ESPN.

If Disney is successful in its plans to shift towards a subscription-based TV revenue model as compared to linear programming. It could significantly boost its profit margins. The company is following the benchmark set by Netflix Inc. (NASDAQ:NFLX) the most successful premium streaming service provider.

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The shift could also change the way investors value Disney stock, leading to higher valuation multiples. The stock currently trades at a forward P/E ratio of about 34.63 compared to Netflix’s equivalent of 49.28.

Time to bet on Disney’s growth?

From an investment perspective, Disney’s forward P/E ratio of 34.63 is reasonably low for a high-growth stock. Analysts expect the company’s earnings per share to increase by more than 105% next year and at an average annual rate of about 51% over the next five years.

Therefore, Disney’s diversification to streaming services already seems to have boosted its growth prospects for the foreseeable future. If the company trims linear TV to focus more on subscription services, its growth could become more compelling.

Source – TradingView

Technically, Disney shares seem to be trading within a highly volatile sideways channel formation in the intraday chart. The stock recently bounced off a crucial support level before finding resistance from the 100-day moving average.

However, with the stock still far from retesting the trendline resistance, the current rebound could continue. Moreover, DIS is yet to reach overbought conditions, thus leaving room for more upward movement.

Therefore, investors could target extended gains at about $181.41, or higher at $185.60, while $172.82 and $168.85 are crucial support zones.

It may be time to buy DIS shares

In summary, although Disney shares are up more than 20% this year, the stock is yet to reach overbought conditions after a recent rebound.

Moreover, given the company’s exciting growth prospects, its current forward P/E seems reasonable for growth investors to get excited.

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