Disney (DIS -1.44%) has been a global entertainment powerhouse for nearly a century, but for much of the last two and a half years, the business has grappled with pandemic.

Movie theaters were closed and production shoots delayed. Live sports went on hiatus for several months, and its theme parks have been shut down or heavily restricted for most of the pandemic. Disney+, the streaming service it launched in Nov. 2019, was an initial bright spot, but in the stock's 37% pullback over the last year, investors seem to have forgotten about its potential.

Coming into its fiscal third-quarter earnings report, which came out Wednesday afternoon, investors were curious to see if the company could ride the momentum in the pandemic recovery, and the entertainment giant absolutely did. Revenue in the quarter was up 26% to $21.5 billion, beating estimates at $20.6 billion, while adjusted earnings per share jumped 36% to $1.09, ahead of expectations at $1.00.

What was most reassuring about Disney's earnings report is that its flywheel business model, which has made the company so successful, is finally returning. Unlike those of a pure-play streamer like Netflix, Disney's intellectual property lives multiple lives, reinforcing each segment of the business. A character from a popular movie like Frozen, for example, can be incorporated into a hit toy, a theme park ride, a live entertainment experience, an animated TV series, or any of a wide range of consumer products. That multipronged approach helps strengthen customer relationships with the brand and builds multiple profit streams that can support one another. The model has only become stronger with the growth of Disney+, which gives subscribers 24/7 access to the world of Disney entertainment. 

The Disney flywheel is back

Much of the investor focus in recent years has been on the streaming business, and that makes sense. Streaming has disrupted the cable ecosystem that was so profitable for legacy media companies like Disney, but services like Disney+ give the company an opportunity to own customer relationships outright and increase brand affinity by giving customers what they want.

Overall growth in streaming remains strong, with total Disney+ subscribers up 31% year over year to 152.1 mlllion.  Sequential growth was brisk in all regions except North America, where it added just 100,000 subscribers in the third quarter to reach 44.5 million. Internationally, it added 6 million new Disney+ members in the quarter, bringing the total to 49.2 million, and it gained 8.3 million subscribers on Disney+Hotstar, its low-priced service primarily focused on India, to reach a total of 58.4 million. With 14.1 million total Disney+ subscribers added in a single quarter, there's still plenty of growth left for the streaming platform. 

As it invests in streaming service content, the company is taking a wider loss in the direct-to-consumer segment, which expanded from $293 million to $1.06 billion even as revenue increased 19% to $5.06 billion, but Disney can afford to take on losses in the growing streaming business.

What's making up for the wider loss in streaming is the return of the theme parks business, which went dark during the pandemic. Revenue from the parks segment jumped 70% in the quarter to $7.4 billion, and operating income surged from $356 million to $2.2 billion, even though Shanghai Disney remained closed for nearly the whole third quarter.

Because of the flywheel business model, Disney is able to pour theme park profits into the streaming business, giving it an advantage over its streaming competitors. By comparison, Netflix burned billions in cash over several years before finally scaling to the point where it could support its content spend without taking on more debt.

Why Disney stock is a buy

Disney is still facing some pandemic-related headwinds, in particular with the temporary closing of Shanghai Disney, but that's another sign its financial results have room for improvement. Over the last four quarters, adjusted earnings per share (EPS) have improved to $3.45, but Disney's annual adjusted EPS peaked in fiscal 2018 at $7.08 before the company acquired Fox's entertainment assets and launched Disney+.

In other words, Disney is a considerably bigger company than it was in 2018, and its profits should eventually top the $7.08 in EPS it posted that year as the streaming business matures. It could reach that goal sooner than expected, especially as Disney+ will launch an advertising tier in December and Shanghai Disney will reopen when the COVID situation cools in China. Remarkably, the stock is essentially flat over the last five years, meaning the market seems to be ignoring the value of Disney+ entirely.

Based on an EPS of $7, the stock would have a price-to-earnings ratio of less than 18, even cheaper than the S&P 500's P/E of 21, making the stock look like a bargain, considering that streaming still has a lot of growth left and its theme parks are also not at full capacity.

Right now, Disney offers a unique combination of growth and value to investors, but the bargain price may not stick around for long. Recession fears and inflation have weighed on the stock, but there are signs the economy is bouncing back, and profits should continue to surge as the business recovers from the pandemic.

At the current price, the upside potential is much greater than the downside risk.