Could Disney End Up Being the Next Nike?

Walt Disney (NYSE:DIS) and Nike have been iconic brands for decades. They have, however, been struggling of late. Their valuations have been declining, and generating strong growth has also been much more of a challenge than it has been in the past. Both have also changed CEOs in recent years.

Disney's decline hasn't been as disastrous as Nike's (it has lost nearly 80% of its value in five years), but it could end up following the same path. Here's why I think investors are better off avoiding the entertainment stock.

Image source: Getty Images.

Why Disney's stock could be in trouble

I see many similarities between Disney and the apparel company Nike. They are in entirely different sectors of the economy, but the problems are comparable. Nike has long been a premium brand, but demand for its high-priced products has declined sharply. The business is struggling to turn things around.

Disney is still growing its business and generating decent numbers, but how long that may last is questionable. Between rising prices and long lines, it's debatable just how much value an experience at one of Disney’s parks really offers families these days. It may face a reckoning in the near future, especially as inflation strains consumers' budgets and they opt for cheaper travel and entertainment options.

I also see the modest growth in its entertainment segment (it was just 6% last quarter), which includes its Disney+ streaming service, as another example of the challenges the brand is facing these days in winning over consumers.

The stock is cheap, but that doesn't mean it can't go lower

Disney's stock is trading at 21 times its trailing earnings, which is modest in relation to the S&P 500 average of 23. And the gap widens when looking at the forward price-to-earnings (P/E) multiple, which considers the earnings growth ahead for the business (based on analyst projections). Disney's stock is trading at a forward P/E of 14, while the S&P average is 20.

But a low valuation is not a surefire strategy for buying stocks. They can dip lower, especially ones that appear to be in trouble, which is my assessment of Disney. The brand may be losing its luster, and while it's still growing, a significant chunk of that growth is simply due to price increases.

Disney's stock has declined by more than 40% in five years, and I wouldn't be surprised if it incurs even greater declines in the future. With too many question marks around the business, this is a stock I'd avoid right now, as it looks to be on the same path as Nike.

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