Walt Disney (DIS 1.09%) investors breathed a sigh of relief when Bob Iger, Disney's CEO from 2005 to 2020, replaced Bob Chapek in late November.

The news was surprising considering Iger had chosen Chapek as his successor. But it was a tall order for Chapek, who was tasked with growing Disney's streaming platform and had to deal with the unexpected COVID-19-induced slowdown at its parks. The declining stock price, paired with questions about Disney's profitability, was enough for Wall Street to cheer Chapek's removal.

When Iger's return was announced on Nov. 21, Disney stock jumped on the news to over $100 a share. But since then Disney stock has given up all of those gains -- and then some -- and is now hovering around an eight-year low. 

The decline in Disney's stock and quarter after quarter of disappointing news are the perfect setup for long-term investors to take a closer look at Disney. Here's why it stands out as a no-brainer blue-chip stock to buy.

A child reacts enthusiastically to a storybook.

Image source: Getty Images.

The context of the Disney stock sell-off

Disney bought Marvel in 2009 and Lucasfilm in 2012. But it wasn't until 2019 that the company notched its best box office year in company history, paired with its greatest box office hit in Avengers: Endgame. Disney was in top form in 2019, releasing Disney+ that November and preparing for another record year in 2020.

Then the COVID-19 pandemic hit, throwing a wrench in that growth trajectory. But Disney has still done a great job building out its streaming platform, which has more subscribers than Netflix. And it's had a lot of success at the box office this year, particularly with Avatar: The Way of Water

With all of these developments, it might seem shocking that Disney stock is at an eight-year low -- a price that predates Disney+ by several years, and many of the company's most profitable productions. But the short-term stock performance can be boiled down to a dramatic shift in Wall Street's perception of Disney's streaming endeavors.

Disney stock hit an all-time high of $203.02 per share on March 8, 2021, when Wall Street was cheering growth and optimism for streaming was strong, even though Disney+ wasn't profitable.

But once inflation began to be a lingering issue, interest rates started to rise, and recession fears and declines in consumer spending came into the fold, the perception of Disney+ suddenly turned from optimism to pessimism. The consequences of falling profits and record-high operating expenses were reflected in Disney's stock slipping price.

DIS Chart

DIS data by YCharts

Disney's business is highly cyclical and depends on a strong consumer. If the economy is firing on all cylinders, then investors tend to be more willing to be patient with losses and let a growth opportunity play out.

But if the economic situation is deteriorating concurrently with streaming losses, it's a one-two punch and a cue for Wall Street to dump the stock. Throw in the fact that Disney's parks only began recovering from their pandemic slowdown in fiscal 2022, and the timing of a recession for Disney couldn't be much worse.

A reasonable valuation

When approaching a stock like Disney, I think it's important for long-term investors to understand why the stock is performing poorly so they can determine if the downward pressure is in response to short-term factors or because of lasting damage to the long-term investment thesis. The reality is that Disney+ remains unprofitable.

And management's update from the recent conference call does little to quell this bad news. "Assuming we do not see a meaningful shift in the economic climate, we still expect Disney+ to achieve profitability in fiscal 2024, as losses begin to shrink in the first quarter of fiscal 2023," said former CEO Bob Chapek on the Disney Q4 fiscal 2022 conference call.

So if the economic climate worsens, could it mean that Disney+ doesn't achieve profitability until fiscal 2025? Fiscal 2026? It remains to be seen. But if you're a hedge fund or short-term trader, you may take these comments to mean there won't be upside from Disney+ for years.

But for long-term investors, you're basically getting Disney+ and all of the other improvements the company has made in the last eight years for free. That's a strong incentive to buy or at least hold the stock, even if it takes time for the company's vision of a profitable streaming segment to come to fruition.

The good news is that a falling stock price paired with spending cuts is a nice setup for Disney stock to have an attractive valuation. Disney's forward price-to-earnings (P/E) ratio is now about 21, which isn't too low by its historic standards. But it's a great price if you believe that spending will continue to decline, which will help boost profits and further lower the P/E ratio. 

DIS PE Ratio (Forward) Chart

DIS PE Ratio (Forward) data by YCharts

For example, if you think Disney will surpass its record profits from fiscal 2018 in the next five years, then the stock looks dirt cheap. Disney earned $8.36 in diluted earnings per share in fiscal 2018. At its current stock price and with those profits, it would have a P/E ratio of around 10.4. But if you believe the core business alone will match those profits on top of profits from Disney+, then the P/E ratio could be much lower.

Put another way, if Disney's profits return to those fiscal 2018 levels and the stock is double the price it is today, then it would still have a P/E ratio of around 21. 

Disney's brand power

Disney's business goes through cycles. And right now, the company is undergoing a transformational shift in strategy, management changes, and external challenges -- from the pandemic to an economic slowdown. But five to 10 years from now, I think investors will look back and realize it was a great time to buy the stock because of what Disney+ does for the company's sales funnel.

An upside-down pyramid illustrates the author's interpretation of Disney's sales funnel and product and services offering through different media and entertainment options.

Graphic By Author.

This is my interpretation of how Disney+ provides an excellent entry point into the world of Disney and gives the consumer a greater chance at purchasing a more expensive experience, such as going to a park, a show, or a cruise.

Disney's brand equity derives from a blend of nostalgia and the franchise flywheel that fosters multi-generational engagement with its characters and stories. That value isn't going away in this recession or the next. For investors with a long-term time horizon, now is the time to consider Disney stock as a foundational addition to a diversified portfolio.