After an unbelievable surge in 2020 and 2021, Walt Disney (DIS 1.18%) stock has round-tripped and is back down near eight-year lows. But Disney is still spending a ton of money on streaming content, and the stock no longer sports a dividend.

Despite a slew of challenges ahead, here's why the sell-off in Disney stock looks like a buying opportunity.

A person stands in a cave overlooking a rocky mountainous landscape.

Image source: Getty Images.

Firing on some cylinders

Disney's main issue over the past three to four years has been that something is always going wrong. After a record fiscal 2018, Disney had a near-record year in fiscal 2019 where everything was going right. Its parks business was booming. Blockbuster after blockbuster propelled Disney's total box office revenue to $11.1 billion -- an all-time record.

Strength in its linear networks (cable) rounded out another great year at Disney. And with the launch of Disney+ in November 2019, Disney finally had an answer for investors that feared the death of cable and the impact it would have on Dsiney's bottom line.

But then the COVID-19 pandemic hit. Trapped at home with few entertainment options, Disney+ subscribers surged but the parks and movie business segments suffered. Since then, the parks business has rebounded nicely and is the shining light in the Disney portfolio. But box office revenue hasn't been able to match fiscal 2019 levels.

And Disney+ subscriber growth is on the back burner as investors focus on streaming profitability.

Excessive expenses 

Disney has a lot of issues. But they can all be summed up in the following chart:

DIS Total Operating Expenses (TTM) Chart

DIS Total Operating Expenses (TTM) data by YCharts

The problem is that Disney's operating expenses have nearly doubled in the past five years, but those expenses are not translating to bottom-line benefits. Disney's operating expenses are around an all-time high, but operating and net income are lower today than they were 10 years ago. This decline is one of the best arguments for why Disney stock has shown weakness. 

With the parks now well recovered from the COVID-19-induced slowdown, the culprit for Disney's lackluster results is Disney+ -- more specifically, Disney's content spending. Investors cheered Disney's initial strategy to lose money on Disney+ to grow subscribers and establish Disney+ as a top-tier streaming service.

The issue is that Disney has failed to find the sweet spot between how much it needs to spend on content to retain and slowly grow subscribers while making the service profitable. Disney+ finds itself in the awkward position of stalling or slightly declining subscribers and an uncertain path to profitability.

Management remains confident Disney+ can be profitable by fiscal 2024. But given all the disappointment, investors are rightfully taking a prove-it approach to Disney instead of giving it the benefit of the doubt.

Disney+ isn't worthless

"Always invert," says Charlie Munger. What Warren Buffett's business partner means is to try to break your investment thesis by making the best argument for the opposite opinion.

Selling Disney stock at its current price implies that the company is worth less today than before the launch of Disney+. If you looked at the company's operating income or net income in a vacuum, then this argument has merit. But first-level thinking alone doesn't get you far in the stock market.

There's no doubt that Disney has fumbled Disney+. But launching a streaming service that also functions as a content library for decades of beloved movies and shows remains the right long-term decision for the company. It may take a few more years for Disney+ to become and remain consistently profitable. But if we look back at this moment five or 10 years from now, it seems unlikely we'll be saying Disney should have never launched Disney+.

That being said, I think it's fair to say that Disney+ doesn't warrant a significant valuation bump for Disney stock until the results can bridge the gap between expectations and reality. All told, Disney stock doesn't deserve to be bruised and battered. But it also doesn't deserve to be worth way more today than it was when it was putting up much better results in fiscal 2019.

Why Disney is a great value

Buying Disney stock at the current price ($88 a share or so) is an investment in one of the most powerful brands in entertainment. Disney's history is riddled with epic failures and breakthroughs. The company is used to receiving a lot of backlash for ideas that don't work. But one thing that Disney has historically done very well is offset its failures with success.

Since Bob Iger came back as CEO in November, he has made it Disney's mission to cut costs and focus on profitability. In the near term, this is the right decision for Disney so that it can regain its footing, reel in its operating expenses, and find the right balance for Disney+.

The average analyst estimate for Disney's fiscal 2024 earnings per share (EPS) is $5.36, which is still below pre-pandemic levels. But $5.36 in fiscal 2024 EPS would give Dinsey a 16.4 price-to-earnings ratio, an excellent value for blue-chip stock.  

Over the long term, Disney has plenty of ways it can sustain growth -- park expansions, movies, theatrical performances, merchandise, cruises, parks, and more all fit into the Disney portfolio. But what really makes Disney successful isn't any single product or service, but how those offerings fit together to bolster its brand.

If you believe that Disney+ will achieve and stay profitable and that the Disney brand remains strong, then now is an impeccable time to buy Disney stock. If you're on the fence, it's perfectly understandable to take a wait-and-see approach to Disney even though the stock has considerably sold off.