3 Strong Reasons to Buy Disney Stock Before a Big Rally

It may be difficult to believe, but The Walt Disney Company (DIS -1.40%) trades today for less than it did at the bottom of the pandemic market drop in March 2020. A lot has happened to the company in the time since the COVID-19 market bottom, but it could be argued that Disney is in a better place today than it was three years ago.

For those who believe that the House of Mouse is poised to turn its fortunes around, now may be a great time to buy shares before there's a market rally that would make the stock significantly more expensive. Shares today trade for 1.8 times sales, a 10-year low. Let's take a look at three reasons to buy Disney now.

Bob Iger is serious about cutting costs

As successful as the launch of the Disney+ streaming service has been from a subscriber standpoint, production costs have been a drag on the financial results. In the 2022 fiscal year, which ended Oct. 1, the direct-to-consumer (DTC) segment that includes Disney+ posted an operating loss of $4 billion, led by content spend on Disney+. 

This operating loss for the first few years of the Disney+ service was by design, at least to some extent. On the Q2 2023 earnings call, CEO Bob Iger stated that the goal when the service launched was to flood the service with content in order to drive subscriber growth. Now that the business has gained traction, management is looking to reduce content to only the titles it expects to continue to drive subscriptions.

On the Q4 2022 earnings call, management stated that this segment had reached peak operating losses and that results would improve going forward. So far, it has been correct.

Data source: Walt Disney.

Management is expecting a slip back in Q3 but then continued improvement moving forward. This is something to watch, but if the company can continue to improve the operating results of this important segment, it will be accretive to the business overall.

The Disney+ ad-supported tier is driving profits

Disney recently launched an ad-supported tier for its Disney+ streaming service, and the early results are promising. Disney+ average revenue per user (ARPU) increased by 12% sequentially while total subscribers grew by only 0.6%. This ARPU growth is due to the success of the ad-supported tier of the streaming service.

Management has stated that it would like to increase the cost of the ad-free subscription in order to drive more subscribers to the ad-supported tier. The belief is that more subscribers on the ad-supported tier will further drive ARPU and help Disney's bottom line.

The improving operating loss and the growing value of each subscriber should help transition the Disney+ service from being a drag on results to a catalyst to the overall business performance. 

Parks and cruises continue to recover

The obvious impact of the pandemic was the closure of Disney's parks and cruise lines. Over time as the world reopened, these properties and experiences began to recover. In Q2, the parks and experiences segment saw another quarter of improvement.

Data source: Walt Disney.

Management pointed to international parks as being a bright spot for the quarter with higher attendance and improved financial results at properties in China, France, and Hong Kong. Notable among this list is the Shanghai, China park, which experienced a prolonged closure due to the pandemic.

There will likely be some challenges in Q3 that will negatively impact domestic operating margin. However, the international business is expected to continue to recover, resulting in overall operating margin improvement compared to the prior year.

A compelling buy 

Disney is still working its way through some challenges, so there could be more headwinds in the near term. However, today's valuation seems to provide a decent margin of safety. I think Disney is a compelling buy now before a market rally raises the price for investors.