Declining cable-TV subscribers, box office flops in 2023, massive direct-to-consumer (DTC) streaming losses, rising costs for sports rights, proxy battles, and CEO succession issues have plagued Walt Disney (DIS -2.44%) shares. They are down 18% in the past five years, when the S&P 500 has put up a total return of 103%.
Underperformance like this can cause some investors to stay far away from the House of Mouse. However, for those who are patient and can view the business for what it’s worth, there’s an opportunity here.
Here’s why Disney is my favorite investment on the stock market today.
Disney’s moat
Despite what the stock’s disappointing performance over the past five years suggests, Disney still has a wide economic moat. The company’s key durable advantage comes from its invaluable intellectual property (IP) that it’s able to monetize in a variety of ways, whether via video content in theaters or on TV, at theme parks and cruises, or by selling consumer products.
Pixar, Lucasfilm, and Marvel are all owned by Disney. It has high-quality family programming and general entertainment. And it’s able to invest in top sports rights for the NFL, NBA, and college football that are distributed through the popular ESPN brand.
Last year, Disney won 60 Emmy awards, a record. With Inside Out 2, Deadpool & Wolverine, and Moana 2, the business produced three billion-dollar movies that were the top three highest grossing in 2024.
In the physical world, Disney operates seven of the 10 most visited theme parks on the planet. Combined, they see a jaw-dropping 100 million visitors annually.
If an entrepreneur had access to unlimited capital, would they be able to create anything even remotely close to the assets that Disney has? I don’t believe there’s any chance this is possible, highlighting the company’s moat.
Rising operating income
Disney’s DTC streaming segment reported billions in operating losses over the past few years, as management investing aggressively in content, technology, and marketing to scale up the platform and grow subscribers. This pressured the profitability of the overall business.
However, the combined DTC services (Disney+, Hulu, ESPN+) were profitable in the last two fiscal quarters, which appears to be the beginning of a new upward trend. The leadership team expects a long-term double-digit operating margin for the segment that could see billions flow to the bottom line in the not-too-distant future.
Executives also plan to double capital expenditures in the Experiences segment over the next decade to $60 billion. The goal is to expand capacity at theme parks with new attractions. What’s more, Disney will add seven new cruise ships to its fleet, more than doubling the count by 2031.
Given that parks, resorts, and consumer products were able to increase revenue by 79% in the past 10 years, the trajectory certainly points to healthy demand for what Disney offers. Management says there are 700 million Disney fans that have not visited a theme park yet.
Discount price
Disney’s IP is inimitable, protecting its competitive moat and differentiating it in the crowded media and entertainment industry. And the business is in the early stages of registering impressive earnings growth in the years ahead from both its DTC services and its Experiences division.
Yes, the cable networks are in secular decline. But they still generate billions in operating income. They’re not worthless. And with the highly anticipated launch of the flagship ESPN streaming app this fall, there’s another catalyst on the horizon.
Disney’s peak enterprise value (EV) was $422 billion in March 2021. Toward the end of this decade, I believe the company is going to be in much stronger shape (with much higher earnings power) than it was about four years ago. That means the upside is sizable when you realize that the current EV is $249 billion.
The business is being offered to investors at a discount. It’s best to take a closer look at the House of Mouse.
