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Disney Stock Is a Buy Today

Even with Bob Iger back as CEO, Disney faces headwinds—but the stock is a bargain for patient investors.

Disney sign

We believe Walt Disney DIS is successfully transforming its business to deal with the ongoing evolution of the media industry. Direct-to-consumer efforts—Disney+, Hotstar, Hulu, and ESPN+—are taking over as the drivers of long-term growth as the company transitions to a streaming future. Streaming will benefit from the new content being created at the Disney and Fox television and film studios as well as their deep franchise libraries. We expect that Disney+ will continue to leverage this content to create a large, valuable subscriber base. The return of Bob Iger as CEO is not likely to derail this streaming-focused future as he helped to design the strategy before he left company.

Key Morningstar Metrics for Disney

Economic Moat Rating

We assign Disney a wide economic moat rating. Its media networks segment and collection of Disney-branded businesses have demonstrated strong pricing power in the past decade. We believe the addition of the entertainment assets from 21st Century Fox should help the company continue to generate excess returns on capital despite operating in the increasingly competitive media marketplace. One of our guiding premises in media is that the value of content continues to increase even as the distribution markets mutate. Despite changes in distribution, pay-television penetration remains at above 75% of U.S. households. Even without a pay-TV subscription, most cord-cutters still consume video content, and many use antennas to capture signals, providing content creators with an additional avenue to generate revenue from these viewers.

Read more about Disney’s moat rating.

Fair Value Estimate for Disney Stock

Our $155 fair value estimate reflects the company’s realigned segments and lower losses from streaming. We expect average annual top-line growth of 7% through fiscal 2027. We now project losses for the streaming segment to continue through fiscal 2024, linear advertising to decline over the next five years, and a continual decline in linear networks margins. We project Disney’s overall operating margin will improve to 21% in fiscal 2027 from 8% in fiscal 2022 as the losses at the direct-to-consumer segment turn to gains and margin improvement continues at the theme parks.

Read more about Disney’s fair value estimate.

Risk and Uncertainty

On the basis of the competitive linear and streaming media markets that Disney operates in, along with the level of advertising and parks revenue that is exposed to the economy and economic cycles, we believe a Medium Morningstar Uncertainty Rating is more appropriate than High to better reflect the volatility we expect Disney investors will face relative to our global coverage.

Read more about Disney’s risk and uncertainty.

Disney Bulls Say

  • The parks and resorts segment should rebound strongly from the pandemic as families still view the parks as a prime vacation destination.
  • Disney+ has a long runway for growth available in the U.S. and internationally. Original series and the deep and constantly expanding library will drive the growth.
  • Although making movies is a hit-or-miss business, Disney’s popular franchises and characters reduce this volatility over time. Additionally, the company’s annual slate does not generally rely on one big picture, reducing the downside from a flop.

Disney Bears Say

  • The business model for the media networks division depends on the continued growth of affiliate fees. Any slowdown in the growth of these fees as pay-TV subscribers continue to decline could tremendously hit profitability.
  • The streaming space is becoming increasingly crowded. Disney may need to continue to fund losses at this segment beyond fiscal 2024.
  • Developing mass-market hit programs can be unpredictable, especially as media fragmentation continues. Attracting and retaining talented creatives has been and will remain very competitive and expensive.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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