After Earnings, Is Walt Disney Stock a Buy, a Sell, or Fairly Valued?

Walt Disney released its third-quarter earnings report on Aug. 6. Here’s Morningstar’s take on Disney’s earnings and stock.

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate: $120.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Walt Disney’s Q3 Earnings

Walt Disney has made a lot of news, and further transformation of its business is imminent, but its fiscal third-quarter results weren’t particularly notable. Strong experiences growth and an upward trend in streaming profits countered lackluster sports results and streaming sales.

Why it matters: Disney is successfully managing the decline of the traditional television industry, which once made up most of its profits. Today, the rapidly declining entertainment linear networks make up less than 20% of operating profits, linear ESPN is stable, and streaming profits are expanding.

• Entertainment streaming operating income grew for the fourth straight quarter to reach $346 million, versus negative $19 million a year ago. This profit from streaming was half as high as from entertainment linear networks. The gap will close further as linear declines while streaming trends up.
• Excluding Star India, which Disney divested in December, sports operating income declined 4% year over year, largely due to higher rights fees, and sales grew 1.5%. However, the sales trend has been up, and the fate of this segment will be determined by streaming ESPN, set to launch Aug. 21.

The bottom line: We maintain our $120 fair value estimate, as our outlook is unchanged. We think Disney has positioned itself well to navigate the evolving media industry. Additionally, its experiences business, which is the dominant factor behind our wide-moat rating, continues getting stronger.

• Experiences operating income grew 13% year over year on 8% higher sales, boosted by the launch of a new cruise ship last year and strong domestic results that included flat attendance and higher spending per guest. The firm has two additional cruise ships due this year.
• The whirlwind of news included ESPN’s deal with the National Football League, the official launch date for the ESPN streaming service, and the consolidation of the Hulu and Disney+ streaming platforms. Each of these items should further enhance streaming prospects.

We see the stock as only modestly undervalued at current levels, and we think near-term stock movements will be very sensitive to macroeconomic data. That said, we’ve already accounted for an economic slowdown in our model, so we don’t see much downside risk to our fair value estimate, even in a typical recessionary scenario.

Fair Value Estimate for Disney

With its 3-star rating, we believe Disney’s stock is fairly valued compared with our long-term fair value estimate of $120 per share. We project entertainment linear network revenue to decline by mid-single digits annually throughout our 10-year forecast, as pay-TV subscriptions and linear television ratings continue to decline, weighing on both subscription and advertising revenue. We are slightly more optimistic about sports linear networks, but we now expect sports linear and streaming to merge into a more cohesive offering. We largely see ESPN’s flagship streaming offering—due in 2025—and pay-TV network to offset each other. We project sports revenue to grow about 3% annually throughout our forecast.

Read more about Walt Disney’s fair value estimate.

Economic Moat Rating

We assign Disney a wide moat based on its intangible assets. Ultimately, we believe the firm’s ownership of timeless characters and franchises and its ability to continue creating and attracting top-tier content outweigh the near-term challenges it faces. Although we think a media industry not built on the traditional pay-TV bundle will likely prevent Disney from returning to the level of economic profitability it routinely achieved in years past, we still expect the firm’s returns on invested capital to comfortably exceed its cost of capital over the next 20 years.

Read more about Walt Disney’s economic moat.

Financial Strength

Disney is in sound financial health, even as the debt load and financial leverage are higher than they’ve been historically. Disney ended fiscal 2024 with $37 billion in net debt and a 1.9 net debt/EBITDA ratio. With the cash burn in its streaming business now in the past and the remaining stake in Hulu fully paid for, Disney’s balance sheet should continue improving as free cash flow remains well above the levels it achieved during the first several years of this decade. The firm generated over $8 billion in fiscal 2024, and despite heightened near-term investment, we anticipate a similar level in 2025 and 2026 before further acceleration.

Disney stopped paying a dividend in 2020 when the pandemic hit and the firm needed to preserve cash. With debt down and its cash flow outlook much improved, Disney reinstituted its dividend in 2024. We believe the dividend will grow and share repurchases will be on the table, especially if the stock remains at depressed levels.

Read more about Walt Disney’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Disney is High. The ongoing evolution of the media industry is the main factor behind our assessment. Outside of its experiences business, Disney historically had three main sources of revenue: fees from pay-TV distributors to carry its bundle of channels, advertising, and licensing fees for movies and television programming. All these revenue sources are now under pressure. Cord-cutting and diminished linear television viewership have depressed carriage fees and advertising revenue. Changes at the box office thanks to lower attendance, fewer movies, and shorter theater windows have been a headwind for licensing revenue.

From an environmental, social, and governance perspective, we believe potential social issues carry the greatest risk. The entertainment industry in general has a history of bad behavior regarding issues like sexual assault and harassment or racial and gender discrimination. Disney has not been immune to lawsuits in the past, and there’s always a risk of additional ones. We doubt any individual suit could create a material financial impact, but harm to the firm’s image could bring consequences with consumers and employees that ultimately dent Disney’s business.

Read more about Walt Disney’s risk and uncertainty.

DIS Bulls Say

• No peer can match the depth of Disney’s iconic characters, franchises, or content library, which will keep the firm’s streaming services in high demand and give it a leg up in creating new movies and television shows.
• Disney’s streaming services will become a major driver of profits and offset linear declines. The existing DTC business has made a major turn to profitability, and the introduction of traditional ESPN as a streaming service in 2025 should fuel further demand.
• The allure of Disney’s parks business is unmatched and will be a continuing profit engine.

DIS Bears Say

• Linear television will continue to decline. Even if successful, newer revenue sources like direct-to-consumer streaming will never equal the profitability Disney once enjoyed.
• Disney now competes with tech companies for major sports rights, which may have an incentive to continue driving up prices. Sports remain material to Disney’s future, and being forced to pay up for the critical content will depress profits.
• There are now too many streaming platforms, and it’s questionable whether consumers will be willing to pay high prices or stick with individual services.

This article was compiled by Isela Meraz.