Walt Disney (NYSE:DIS) just closed the books on a terrific fiscal 2018, with record performance in the studios segment and strong growth in its theme parks division. For the year, total revenue grew 8% and adjusted earnings per share jumped 24% over fiscal 2017.

What's impressive is that Disney continues to turn out solid growth even while nursing a lackluster media networks segment (41% of total revenue), which continues to lose subscribers to its cable channels.

However, the company's fourth-quarter earnings report showed net subscriber losses moderating for the fifth straight quarter. That improving trend comes as Disney is doubling down on its direct-to-consumer strategy with the new ESPN+ streaming app, which is off to a strong start, as well as the highly anticipated Disney+ app launching in late 2019.

There's been a lot of talk about whether Disney can really compete with Netflix (NASDAQ:NFLX), but that misses the point. All Disney needs to do is simply be an appealing supplementary service that you pay for in addition to Netflix, and Disney has an impressive slate of content it's working on that should help pull in subscribers, especially Marvel and Star Wars fans.

A statue of Walt Disney and Mickey Mouse holding hands in the middle of a path to the entrance of a Disney building.

Image source: Walt Disney.

Digital Disney

Some would argue that Disney is entering the streaming market a little late, given how dominant Netflix and Amazon.com's Prime service are in the streaming video market. But for Disney this might be the best time to capitalize on what clearly is a hot entertainment brand given recent success with its movies and theme parks.

An early estimate from Morgan Stanley valued Disney's streaming service at $25 billion over the next 10 years. That estimate assumes Disney+ gains 30 million subscribers, which may prove conservative.

Consider that 60% of Netflix's 137 million members watch family content each month, which would include Disney content. However, Disney is pulling its content (excluding Marvel TV shows) from Netflix in preparation for Disney+. Those roughly 80 million Netflix members who regularly watch family content will be a sizable addressable market for Disney+ when it launches.

Disney CEO Bob Iger has said that the plan is to price the service lower than Netflix at the start because of the smaller amount of content that Disney+ will offer in the early going. "We feel that it does not have to have anything close to the volume of what Netflix has because of the value of the brands and the specific value of the programs that will be included on it," Iger said.

Disney has already launched the new ESPN+ app, which surprised analysts by attracting more than 1 million subscribers in the first six months. Considering the strong slate of content Disney is working on, it's possible analysts could be underestimating the appeal of Disney Plus, as well.

Exclusive content

Disney+ will open the floodgates of the company's entire vault of film and television content. But the biggest draw for new subscribers will likely be the original content the media giant is working on, such as a live-action Star Wars series directed by Jon Favreau, who was behind blockbuster releases like Iron Man, The Jungle Book, and The Avengers. Disney is also working on animated content from Star Wars and Pixar, a live-action version of The Lady and the Tramp, Togo, and a live-action Marvel series. 

Disney can't bring over hit Marvel series like Daredevil from Netflix, probably because of contractual reasons. Netflix management recently stated that the decision is up to Netflix to cancel those existing Marvel TV shows. But it's likely that any future Marvel TV series will be found exclusively on Disney+.

Additionally, Disney's 2019 movie slate shows the company continuing to tap classic franchises just in time to ignite interest in Disney+. Next year the company is releasing Mary Poppins Returns, as well as live-action versions of Dumbo, Aladdin, and The Lion King

The company has had extraordinary success with live-action releases of Beauty and the Beast (2017) and Cinderella (2015). This new round of live-action releases should not only serve as a major pull for Disney+ members, but could keep the momentum going in the studios segment, which is coming off a record year.

Segment Revenue Fiscal 2018 Change (YOY)
Media networks $24.5 billion 4%
Parks and resorts $20.3 billion 10%
Studio entertainment $9.9 billion 19%
Consumer products and interactive media $4.7 billion (4%)
Total $59.4 billion 8%

Data source: Walt Disney. YOY = year over year. 

Additionally, the acquisition of Twenty-First Century Fox's (NASDAQ:FOXA) entertainment properties not only provides the House of Mouse even more exclusive content to offer Disney+ members, but the deal also gives the company additional talent to oversee movies and television production. This may be an overlooked benefit of this deal that many investors aren't appreciating yet.

Most importantly, this could have very positive ramifications for Disney's 60% ownership of Hulu the combined company will own. Iger said, "We aim to use the television production capabilities of the combined company to fuel Hulu with a lot more original programming ... that we feel will enable Hulu to compete even more aggressively in the marketplace." 

Underappreciated Disney

Even with Disney stock sitting close to a new high, the valuation still looks compelling at a forward P/E of 15.5. That is a discount to the S&P 500's forward P/E of 16.7, which could signal that Disney shares are undervalued.

With Disney making its content more exclusive through its own digital distribution platforms, investors may want to consider buying shares now before better news sends the stock higher.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.