Despite being a media and entertainment powerhouse that is well known across the globe, Walt Disney (DIS -1.74%) has been a terrible investment in recent years. Had you invested $1,000 in the shares five years ago, you would've lost 25% of your starting capital (as of this writing).
However, I think much better times are ahead for the business, and investors should take notice. Here are three reasons to buy Disney stock like there's no tomorrow.
Valuable intellectual property
One sign of a great business is the presence of an economic moat. This allows a company to stay ahead of the competition for an extended period. Disney undoubtedly has a wide moat, which is one reason investors should own the stock.
The company possesses unmatched intellectual property (IP) with all of the characters, storylines, and franchises it has developed over the decades. This all holds a special place in the minds and hearts of consumers across the globe.
If someone had $50 billion or even $100 billion to create a replacement for Disney from scratch, I don't think that person would succeed. Sure, they could develop new characters and stories in TV shows and movies, but will they resonate with consumers? Will this entrepreneur then be able to monetize that IP downstream via theme parks or merchandise? I don't think so.
What Disney has built is truly special, and it takes a very long time to get to that position. This makes the business irreplaceable, which is a fantastic trait you want to see in a portfolio holding.
Rising profits
In fiscal 2018, Disney generated $15.7 billion in segment operating income. Fast-forward to fiscal 2023, and that figure fell 18% to $12.9 billion. This is not exactly an encouraging trend, especially since revenue rose 50% over that five-year stretch. And it's surely one main reason why the stock hasn't done that well in recent years.
Disney has been investing aggressively to ramp up its direct-to-consumer (DTC) streaming operations. This requires a lot of capital to be directed to developing the underlying technological infrastructure, as well as the creation and licensing of content to put on these platforms to draw in viewers. Of course, upfront investments will deal a negative blow to the income statement in the near term.
However, the business has hit an inflection point. Disney's DTC segment, which includes Disney+, Hulu, and ESPN+, finally posted positive operating income in Q3 (ended June 29). The leadership team believes that figure will be higher going forward, particularly with the help of ongoing cost cuts and other operational efficiencies.
With 153.8 million subscribers, Disney+ is already one of the few leaders in the streaming industry. With such a huge content slate, and the ability to offer a valuable bundle with Hulu and ESPN+, there is probably pricing power that management can take advantage of. Consequently, it's not hard to believe that DTC earnings will rise meaningfully in the years ahead, which should lift the profitability of the overall business.
Compelling valuation
The market remains somewhat pessimistic about Disney's prospects, as evidenced by the stock being down 52% from its March 2021 peak. But this is where the opportunity lies for the patient investor.
As of this writing, the stock trades at a forward price-to-earnings ratio of 18.8. This is close to the cheapest levels the shares have sold for in the past three years. And it represents a notable discount to the S&P 500.
Investors who are willing to buy and hold for the next three to five years are in a good position to see strong returns, thanks to a wide moat, increasing profits, and a higher valuation multiple.
