Please ensure Javascript is enabled for purposes of website accessibility

Why You're Still Underestimating Disney Stock

By Travis Hoium – Aug 17, 2021 at 11:30AM

Key Points

  • Parks are still underperforming historical trends, but when they return Disney's profits could jump.
  • As strong as streaming is, it's losing money, but Disney has lots of ways to grow revenue long-term.
  • Add it up and Disney's future is extremely bright.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Disney has growth opportunities in nearly every one of its businesses.

Disney (DIS -2.74%) 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. 

Travis Hoium owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Walt Disney Stock Quote
Walt Disney
$96.16 (-2.74%) $-2.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.