Disney (DIS -1.08%) has had about as rough a time during the pandemic as any large company on the stock market. Theme parks are still operating at a fraction of what they were pre-pandemic, theaters are struggling to generate any kind of comeback, and production of new content has slowed to a crawl. The silver lining has been Disney+, which is clearly a juggernaut in streaming content with 116 million subscribers. 

As theme parks come back up to speed, Disney could be more profitable than ever. And that's one reason why I think this is a stock investors are still underestimating

The castle at Tokyo Disneyland.

Image source: Disney.

Disney is still a fraction of itself

It may surprise you to learn that theme parks have traditionally been nearly half of Disney's profits. So, when attractions shut down due to COVID-19, it was a huge hit to the company financially. We can see that Disney is still a long way from being fully recovered based on recent results. 

Below is a look at operating income from Disney's main divisions; in the column on the right I've replaced third quarter 2021 operating income with third quarter 2019 operating income. You can see that profitability jumps over 50% if parks are open as they were pre-pandemic. 

Item Q3 2021 Operating Income Q3 2021 With Open Parks at 2019 Levels
Media and entertainment $2.03 billion $2.03 billion
Parks, experiences, and products $356 million $1.72 billion
Total $2.38 billion $3.75 billion

Source: Disney earnings reports. 

There's reason to think this still underestimates Disney long-term. For one, parks have been raising prices and if the company can fill parks at higher prices we could see a jump in operating income in coming years. 

More importantly, we're not seeing the full impact of Disney+ in the numbers above. Disney is still adding subscribers rapidly, with the number of paid subscribers doubling over the last year to 116 million. Price increases for Disney+ in the U.S. also haven't kicked in, but will start to next quarter. The average monthly revenue per subscriber also dropped from $4.62 a year ago to $4.16 in Q3 2021 because of the launch of Disney+ Hotstar in India. India may not command as high a price as the U.S., but if history is any indication I think we'll see revenue per subscriber creep higher long-term. A few years from now, Disney may be approaching double-digit revenue per subscriber. 

Finally, content costs are high for Disney+ because the company is investing to build a compelling content library. For perspective, Disney's linear networks reported an operating profit of $2.19 billion last quarter and direct-to-consumer (which includes Disney+) lost $212 million. Over time, revenue from Disney+ will overcome content costs, but we're not seeing that yet. 

You can see the trend here. Disney's operating income would be much better if parks were open, but we should also expect the growth in subscribers and higher prices for Disney+ to help profitability in coming years. 

Disney's financial waterfall will only get stronger

I look at Disney's business like a waterfall. Traditionally, great movies lead to a big box office, which leads to DVD sales, which drive content for TV networks, and eventually rides at theme parks as well as sales of consumer products. Streaming makes this cycle shorter and more intimate for Disney because it now has a direct relationship with its consumers. 

With Disney+, Disney knows whether you watch Marvel shows, Pixar movies, or National Geographic and it can cater marketing to your interests. This may lead to rides and media content that better matches users' interests and ultimately provides better experiences for and more revenue from each consumer. But it will take years for this loop to be optimized. 

Don't underestimate Disney

We're just starting to see Disney's potential financially now that streaming is in full swing and theme parks are starting to open. I think over the next decade we'll see a steady increase in revenue and operating profit. Shares of Disney may seem expensive today at 77 times analysts' earnings estimates for 2021, but the company is still coming out of the dark days of the pandemic and could be a cheap stock if you hold it through the recovery.