Despite being such an iconic business, Walt Disney (DIS +1.98%) has made for a terrible investment in recent years. Since February 2019, the share price of the media and entertainment giant is down 22%, which is worrying when you see the huge gain of the broader S&P 500 (^GSPC +1.02%).
It can be easy to toss Disney out of consideration for your portfolio, but I believe the company deserves a closer look, with shares trading 46% below their peak. Here are three reasons to buy this top consumer discretionary stock like there's no tomorrow.
1. Direct-to-consumer success
The first reason to scoop up Disney stock is the improving situation within the direct-to-consumer (DTC) streaming segment. After launching Disney+ in November 2019, the business was posting massive operating losses in this division as it spent heavily to scale up the service. This seems to be a key factor that weighed on the stock.
But DTC is turning the corner financially. Disney+ and Hulu combined raked in $293 million in operating income in the first quarter of Disney's fiscal 2025 (which ended Dec. 28). Management expects $1 billion for the full fiscal year. Then, in 2026, the plan is to register a 10% operating margin, up drastically from basically zero in fiscal 2024.
It's amazing what an intense focus on cost efficiencies can do, as CEO Bob Iger aims to limit the quantity of content created in favor of higher-quality output. Running a tighter ship in this regard hasn't gotten in the way of membership growth, as in the latest fiscal quarter Disney+ and Hulu (excluding Live TV) each increased their subscriber counts by 12% and 9%, respectively, on a year-over-year basis.
Thanks to its tremendous intellectual property (IP), Disney has become a streaming winner with proven pricing power. And it's poised to continue its success in the years ahead. That's because it has the unique capability to bundle its services for consumers, which can support higher engagement and lower churn.
Add this to the upcoming launch of the flagship ESPN streaming service, and it's not unreasonable to expect Disney's DTC operation to add billions of dollars to the bottom line in the years ahead.
NYSE: DIS
Key Data Points
2. Growth in the experiences segment
The second reason is Disney's parks, cruises, and consumer products, known collectively as the experiences segment. In fiscal 2024, this provided 37% of company revenue and 60% of operating income. It's arguably the single most important aspect of the overall business. And it's probably the most competitively advantaged, given the high barriers to entry in the industry, as well as Disney's ability to raise prices over time.
Executives are doubling down, with the intention to spend $60 billion on capital expenditures on the segment over the next decade. This includes adding new attractions at parks and bringing more cruise ships to the fleet. Essentially, Disney is focused on boosting capacity in an effort to serve more customers across the globe.
This strategy makes sense. According to management, "for every one guest who visits a Disney Park, there are more than ten people with Disney affinity who do not visit the Parks." It's safe to say that there's lots of untapped demand.
3. An undervalued stock
The third reason is that the stock looks inexpensive. With Disney shares trading at 46% off their all-time high, it's reasonable to see them as extraordinarily undervalued today. The market has rightfully been concerned about the company's ability to successfully navigate a changing media landscape. But based on the latest financial results, Disney is making great strides.
Investors have the opportunity to buy shares at a forward price-to-earnings ratio of 19.8 -- a 12% discount to the overall S&P 500. That disparity should close, and even reverse, once the market stops forgetting that Disney is a top consumer brand with world-class IP and growing earnings power. Bullish investors should consider buying the stock.
