3 Reasons to Buy Disney Stock Like There's No Tomorrow
Walt Disney (NYSE: DIS) is a film and TV powerhouse that most readers will certainly be recognize. But the business hasn't been kind to its investors in recent years. Shares today are 56% off the all-time high they touched in early 2021.
That said, there are three compelling reasons to remain optimistic about this top media stock and buy it like there's no tomorrow.
Disney's competitive strengths
Investors looking to hold shares of companies for the long haul should try to identify those that possess economic moats -- qualities that protect their businesses from the ongoing threats of competitors and new entrants. Without a doubt, Disney falls into this category.
Thanks to its various studios, including Pixar, Marvel, and Lucasfilm, it owns a catalog of intellectual property that would be virtually impossible for any rival to imitate -- beloved characters like Mickey Mouse and Elsa as well as top-notch franchises like Star Wars and Marvel Comics.
Furthermore, Disney has the scale and broad reach to fully monetize all of this intellectual property. While some of its entertainment industry peers might only produce, market, and distribute films, Disney can also make money from its properties through its theme parks and merchandise, years after the initial investment was made to create the content in the first place.
Disney's profit potential
The blame for Disney's share price plunge in recent years likely rests on its declining profits. In its fiscal 2018 (which ended Sept. 28, 2018), the business reported operating income of $15.7 billion. That metric fell to $6 billion in its fiscal 2023. The massive expenses of ramping up Disney+ have damaged the bottom line.
But I believe the company is now at an inflection point. Disney's direct-to-consumer operation, which includes Disney+, Hulu, and ESPN+, registered its first operating profit in fiscal Q3, which ended June 29. Executives have forecast that the streaming segment's profitability will improve further in the current quarter.
Given management's focus on cost-cutting, it's not hard to believe that Disney's streaming profits will continue their upward trajectory. There is a good chance that the direct-to-consumer operation, which achieved a 0.7% operating margin in the fiscal third quarter, could get somewhat closer to Netflix's stellar 27%. Even at a more moderate 15% margin, Disney's direct-to-consumer unit would rake in $3.8 billion of operating income based on its annualized Q3 revenue.
Moreover, investors shouldn't overlook the company's experiences segment, which covers its theme parks, cruise lines, and consumer products. This part of the business has historically been a meaningful growth and profit engine for the company. Yes, it did demonstrate some weakness last quarter due to moderating consumer demand. However, based on management's plan to invest $60 billion in this division over the next decade, investors have reason to remain optimistic about its long-term potential.
Disney's current valuation
So far in 2024, Disney's shares are down about 2%. That's especially discouraging given that the broad S&P 500 index is up 16%. The market is still worried about Disney's future within a shifting media landscape. CEO Bob Iger will have to juggle a lot of balls in order to create a successful outcome.
But Disney is a high-quality company. It's just dealing with what I believe are temporary issues that should be resolved over the next few years.
Because the market hates near-term uncertainty, the stock has gotten crushed. It now trades at a forward price-to-earnings ratio of 17.9. Based on Wall Street's consensus analyst estimates for fiscal 2026, the shares trade at an even more compelling multiple of 14.6.
Considering the current valuation, Disney's competitive strengths, and its profit potential, the House of Mouse looks like a smart investment candidate.
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Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
