The Walt Disney Company (DIS), a leading American multinational entertainment and media company, made a strong recovery from the pandemic-related disruptions last year. However, the stock has plunged 32.4% year-to-date due to dismal financial performance, increased expenses for Disney+, and fears that strong inflation would continue to erode consumers' discretionary spending.

Its direct-to-consumer division (which includes Disney+) lost $887 million in the second quarter compared to the year-ago loss of $290 million.

DIS’ shares gained 10.7% over the past month to close its last trading session at $104.71, but can the stock maintain its momentum given its weak fundamentals and rising competition?

Here's what could shape DIS' performance in the near term:

Premium Valuation

In terms of forward EV/Sales, the stock is currently trading at 2.92x, 44.1% higher than the industry average of 2.03x. Also, its forward Price/Sales of 2.30x is 69.3% higher than the industry average of 1.36x. Moreover, DIS' forward Price/Cash Flow of 29.90x is 230.2% higher than the industry average of 9.06x.

Inadequate Financials

DIS' revenue increased 23.3% year-over-year to $19.25 billion for the second quarter ended April 02, 2022. However, its income from continuing operations declined 10.4% from the year-ago value to $1.10 billion. The company’s net income decreased 47.8% from the prior-year quarter to $470 million. Its EPS declined 46.9% year-over-year to $0.26.

Negative Profit Margins

DIS' trailing-12-month gross profit margin of 33.8% is 33.4% lower than the industry average of 50.7%. Also, its trailing-12-month ROA, ROC, and ROE are 38.6%, 34.6%, and 46.5%, lower than its respective industry averages. Moreover, its trailing-12-month net income margin of 3.5% is 24.5% lower than its industry average of 4.6%.

POWR Ratings Reflect Bleak Outlook

DIS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DIS has a D for Value and Quality. Its higher-than-industry valuation is consistent with the Value grade. In addition, poor profitability is in sync with the Quality grade.

Of the 18 stocks in the F-rated Entertainment – Media Producers industry, DIS is ranked #12.

Beyond what I've stated above, you can view DIS ratings for Growth, Stability, Momentum, and Sentiment here.

Bottom Line

Given DIS's global appeal and tremendous growth potential, the company is anticipated to grow considerably in the long run. However, its near-term prospects look bleak.

The entertainment company has suffered a significant decline in its direct-to-consumer division. Moreover, given DIS' poor profit margins and premium valuation, we believe it is prudent to avoid the stock now.

DIS shares rose $1.04 (+0.99%) in premarket trading Wednesday. Year-to-date, DIS has declined -31.87%, versus a -12.94% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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