Summary
- Disney shares plunged following quarterly results last week.
- However, DIS stock's valuation has come down to much more attractive levels.
- This has prompted options traders to bet a big rebound.
Disney (DIS) shares plunged following its quarterly results when the company reported disappointing new subscriber additions for its streaming unit. The streaming unit has been a crucial element to Disney's significant gains since the pandemic began. So the weakness, although not surprising, was not received well by investors.
The CEO, Bob Chapek,noted on September 21 that Disney+ subscriber growth would slow down from the prior quarter. Still, when the company provided results on November 10, the stock reacted negatively to the news and dropped by nearly 8%. The steep decline appears to be prompting some traders to bet that Disney's shares bounce back between now down and the middle of December.
There's also some positive news recently which could help lift the shares. There were reports on November 19 that the company was boosting the price of its Hulu Live TV bundle, and that the company may enter sports betting.
Disney Stock's Valuation is Lofty
The stock is not cheap on a PE basis, trading at 28.2 times next-year earnings estimates of $5.66 per share. The average over the past five years has been around 23.6, a level that the stock reached before the pandemic as investors started to focus on the potential of Disney+.
However, when looking at Disney and the revenue outlook, the stock's valuation is much more attractive. Meanwhile, given the higher cost of the pandemic and increased spending for content creation for the streaming service, the sales valuation may prove a better way to measure the company over the shorter term. Based on current sales estimates of $100.6 billion in the fiscal year 2024, the stock currently trades at 2.9 times sales and is in line with its five-year average of 2.8.
Bullish Options Betting
Whether looking at Disney from a sales or earnings standpoint, the valuation today seems to be much more attractive than where it stood just a few weeks ago and appears to be prompting some traders to bet that Disney's stock rebounds. On November 16, the open interest for December 17 $155 puts and calls rose by roughly 19,000 contracts each. Additionally, the $160 puts and calls saw their open interest increase by around 20,000 contracts. The data shows the $160 calls were bought on the ASK for $5.54 per contract, while the $160 puts were sold on the BID for $3.91 per contract. Additionally, the $155 calls were bought on the ASK for $6.50 per contract, while the $155 puts were sold on the BID for $3.15 per contract. Two massively bullish bets that the shares rise over the next four weeks.
Technical Rebound In DIS Stock
From a technical standpoint, a rally seems more than plausible. A huge gap was created on November 10 after the company reported results. The shares have now fallen to support $154.50 and filled a gap created on December 11, 2020. Additionally, the stock has a relative strength index that has reached oversold levels after hitting 30 on November 15.
With strong support of around $154 and a gap to fill at higher levels, the equity has an opportunity to rebound from oversold conditions and potentially even fill the gap around $170, a gain of about 6.5% from the current price of $159.25 on November 16.
However, a break in support around $152.50 could lead to a sharp decline to approximately $128.
The news on the subscriber miss didn't come as a surprise, and the sell-off at this point may be more of an overreaction. Given the valuation and bullish option betting, the stock seems like a good candidate for a short-term rebound opportunity.