How Disney (DIS) Turned the Corner to Become a Winner Again
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On the bright side, the company has done a great job controlling costs across the board, and the theme parks segment delivered strong performance—so much so that management raised its full-year guidance.
With valuations looking significantly less risky compared to both their own historical averages and those of key peers, and fundamentals remaining solid—even if DTC growth hasn't been as explosive as the market hoped—I would say Disney is at a prime stage for a Buy rating.
The current stock price already factors in many of the challenges and uncertainties the market has, but it also opens a window of opportunity for those (like me) who believe Disney can keep delivering steady, long-term profits.
The Disney Backstory
Just to recap, it's important to remember how Disney's story looked not too long ago. When Disney+ launched during the COVID-19 pandemic, the stock shot up to $200 per share. Investors were hyped about the rapid subscriber growth—tens of millions of users in just a few quarters—and it felt like streaming was going to take over entertainment forever.
In those early days, the market cared way more about subscriber numbers and user growth than whether Disney was actually making money from streaming. The whole story was about scale and grabbing market share.
But reality hit pretty fast. Streaming services are expensive to build and run, and Disney was burning a lot of cash investing in original content and tech. At one point, the direct-to-consumer segment was losing roughly $1 billion every quarter, so the focus shifted to when Disney would finally turn that segment profitable.
Meanwhile, cable TV was losing subscribers, which raised concerns about Disney's traditional TV businesses like ESPN and its media networks. And don't forget the parks and experiences segment—a major cash cow for Disney—which took a massive hit during COVID. Even after reopening, visitor numbers bounced around, making people wonder if demand might have changed for good.
The Disney Snapshot Today
After the reality check that sent Disney's stock tumbling from nearly $200 to under $80 in late 2023, it's now trading at ~$112 per share, which feels more in line with where the company stands today. The direct-to-consumer (DTC) segment is now profitable and still growing. In the last quarter (fiscal Q3), Disney+, Hulu, and ESPN+ combined to post around $346 million in operating profit, with the DTC segment hitting an operating margin of about 6%. Revenues in this segment also grew about 6% last quarter, according to TipRanks data.
Disney even raised its full-year guidance, now expecting operating income of $1.3 billion, up from $1 billion previously. Subscriber growth remains solid, but there's some skepticism since growth is slowing down—revenue grew 8% year-over-year in fiscal Q2, but only 6% this past quarter.
Competition in streaming is heating up, and content fatigue is setting in. Disney leans heavily on sequels and remakes, which feel tiring compared to competitors like Netflix (NFLX) that offer a wider range of fresh, original content. This has contributed to Disney's fading dominance at the box office.
Theme parks (the experiences segment) are still doing well, with operating margins around 28%, revenue growth at 8% year-over-year, and profits up 13% in the same period. While important for Disney's overall results, the market's main focus remains on DTC since parks require heavy capital investment and are more cyclical.
So even though the experiences segment is strong, it can't fully make up for slower DTC growth. Given that, I'm not surprised to see such a muted market reaction to Disney's recent results. It also helps explain why Disney has underperformed peers like Netflix (NFLX) and Warner Bros. (WBD) over the past year.
Disney Shifts Focus to Profitable Growth
Looking ahead, it's clear Disney is moving away from the 'growth at all costs' mindset and focusing more on sustainable profits. Bundling streaming services helps reduce churn and gives Disney more pricing power while keeping costs under control. For example, over the last nine months, Disney's revenues grew about 4.6%, while expenses increased only 1.9%, which sets the stage for more positive margin revisions.
The recent plan to launch a standalone ESPN app, aimed at sports fans who want a more personalized and interactive experience, also puts Disney front and center in the live sports TV space. That said, Disney's growth story still depends on steady investment in high-quality original content and franchises, balancing pricing on streaming and sports, and turbocharging its parks. After years of just fixing problems, the company is now able to 'play offense' and move into a genuine 'building phase.'
The interesting part is that, since Disney is basically in a 'reset' stage, these initiatives are piling up and starting to pay off. That makes its current stock price a pretty good buying opportunity. Disney still trades at a relevant premium— around 17.6x P/E versus a sector median of 4.5x —mainly because of its diversified business model and strong IP (intellectual property). That premium is also way lower than the multiples for main streaming peers like Netflix and Warner Bros.
The better news is that Disney's earnings multiple is much less risky now compared to its average P/E of 30.5x over the past year and 26x in the last eight months.
Is Walt Disney a Buy, Sell, or Hold?
The consensus among analysts on Disney stock is overwhelmingly bullish. Over the past three months, 19 out of 21 analysts have rated the stock as a Buy, while only two have recommended Hold. Disney's average stock price target is $136.60, implying about 17% upside from the current stock price.
Disney Finds Its Footing, But Caution Is Warranted
Disney stock is no longer a slam dunk. The market now values the company more realistically, reflecting its current position. Profitability in its direct-to-consumer (DTC) segment is genuine, and growth is underway—though not spectacular—but questions remain about whether these gains can endure amid intensifying streaming competition and persistent headwinds in its linear, content, and legacy businesses.
On the positive side, valuations appear reasonable. With fundamentals recently reset, Disney is well-positioned to go on the offensive in its experiences segment while sustaining solid DTC profitability. Overall, I'd rate Disney as a cautious Buy at this stage.
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