Disney (DIS 0.14%) has been a disappointing stock for investors for years. Over the past five years, shares of the entertainment company are down 1.7% while the S&P 500's total return is 96%.
The struggles of Disney's films have gotten the most attention, but the real reason the company has underperformed is cable TV.
Millions of consumers have cut cable, which lowers the fees Disney charges for channels like ESPN, the Disney Channel, FX, and more. This has been the source of growth and profits for decades, and it's in structural decline. But there are still three reasons to love Disney stock today.
Image source: Disney.
1. Parks are a money machine
The moneymaker for Disney is Parks and Experiences. Over the past 12 months, the company has generated $33.1 billion in revenue and $9.5 billion in operating income from experiences, accounting for more than 90% of total operating income.
And there's both a moat and growth potential now that Disney plans to invest $60 billion in its parks over the next decade. The only other media company with the presence of a major park is Universal, but its parks business is piggybacking on Disney and is much smaller in scale. So competition exists, but it's not very strong.
Once parks are built, they're a money machine, and Disney has some of the best parks infrastructure in the world. This will be a moneymaker no matter how successful future movies are or what happens to streaming.
2. Streaming is making a turnaround
Everyone in media is trying to get into streaming, and Disney has the chance to be a huge player alongside Netflix. But unlike Netflix, Disney has owned IP and a sports play (which I'll get to).
Disney's streaming business has 186.2 million subscribers -- 111.3 million at the Disney+ core, 49.7 million at Hulu, and 25.2 million for ESPN+. That's less than the 260.3 million subscribers at Netflix, but Disney could catch up now that it's bundling Disney+ with Hulu and will include ESPN over the top when that launches next year.
While Disney's streaming business is still losing money, management expects to be operating income positive in a few quarters. And we can't forget the size of Disney's streaming business. It generated $5.5 billion in revenue last quarter and grew 15%, compared to $8.8 billion in revenue and 12.5% growth at Netflix.
Disney isn't in a great position in streaming yet, but it's getting there.
3. Sports for the win
The upside for Disney is in sports. ESPN has been one of the company's best assets for decades, but the cable bundle is in decline. What does Disney do next?
First, it will launch a sports-only bundle with Fox and Warner Bros. Discovery, which could satisfy the needs of some customers. But the bigger vision is making ESPN the go-to home for sports.
In the recent fiscal Q1 2024 conference call, CEO Bob Iger said ESPN is going over the top (to streaming) in fall 2025 and will include integrations with ESPN Bet, fantasy sports, e-commerce, and live stats. This could change the way fans watch sports and may mean the company becomes the leader in streaming sports.
One of the reasons I think Disney has a better chance in sports than most competitors is its ability to create a bridge to the future. The company can combine distribution through ABC, ESPN, and streaming ESPN. This will give the financial ability to bid competitively with big tech companies and maintain a distribution advantage for sports fans.
Disney is set up for success in media and entertainment
There are short-term challenges for Disney, but the company is well positioned to succeed long term in experiences and streaming media. Combined, those will be a profitable position in the industry, and investors are paying just under 26 times free cash flow for a business that has yet to see streaming turn a profit.
As Disney's media business turns around, I like the stock's potential, despite the negative sentiment in the market today.
