After Earnings, Is Disney Stock a Buy, a Sell, or Fairly Valued?

Walt Disney released its fiscal third-quarter earnings report on Aug. 5. Here’s Morningstar’s take on Disney’s earnings and stock.

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate
  : $125.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Disney’s Fiscal Q3 Earnings

Experiences and streaming drove Disney’s 7% fiscal third-quarter sales growth and operating margin expansion of 3 percentage points versus the prior year. Free cash flow ($3 billion) remained strong amid the experiences investment cycle, and the firm is putting more cash into share repurchases.

Why it matters: Experiences (40% of third-quarter revenue and 54% of operating profit) and entertainment streaming (22% and 13%, respectively) are the keys to Disney’s future financial performance, with ongoing content creation and franchise development supporting those businesses.

• Experiences sales rose 10% on strength in domestic patrons at US parks and the benefit of new cruise ships, offsetting a slowdown in Asia and still-depressed international visitors to US parks. We expect experiences to accelerate as the economic backdrop improves, and new cruise ships and attractions are on the way.
• After excluding the benefit of tariff refunds, we estimate the experiences operating margin expanded by 2 percentage points, due entirely to operating leverage and revenue mix.

Key stats: Streaming sales (excluding ESPN) rose 11% despite weak ad pricing, and the operating margin nearly doubled to 12.9%, though profits benefited from the timing of spending.

• We aren’t bullish on any mature platform’s ability to maintain double-digit sales growth. However, we believe cost discipline and operating leverage on moderate sales growth can drive streaming operating profits to average double-digit growth for the next 5-10 years.
• We believe Disney will benefit from integrating Hulu and Disney+ and adding more personalization and programming into Disney+ and ESPN, as it’s doing through deals with third parties like Fox, the CW, and TikTok.

The bottom line: We maintain our $125 fair value estimate and wide moat rating. We believe Disney’s irreplaceable characters will continue to drive a healthy experiences business that we estimate is worth nearly as much as the market values the whole firm.

• We think the stock is undervalued, with little optimism built in. The only caveat is that the firm’s most important business (experiences) is economically sensitive, so investors should be aware of possible volatility. Our forecast builds in a potential near-term slowdown, so there’s a margin of safety in our valuation that would give us confidence as a holder of the stock on a selloff.

The following are excerpts from Morningstar’s company report on Walt Disney.

Fair Value Estimate for Walt Disney

With its 4-star rating, we believe Disney stock is moderately undervalued compared with our long-term fair value estimate of $125 per share, implying a P/E multiple of 18 and EV/EBITDA multiple of 11 times our fiscal 2026 projections. Our valuation is most sensitive to our experiences projections, as that segment makes up more than half of total operating profit, a level we expect it to stay above throughout our forecast.

Streaming is the next most important component of Disney’s financial results, accounting for more than 20% of revenue in fiscal 2026 and more than 10% of operating profit, figures that are rapidly increasing. We project mid-single-digit annual sales growth from Disney+ and Hulu.

Excluding streaming, we project sales and profits in the entertainment segment to decline slightly each year over our forecast period. We project consolidated margins to expand and free cash flow to rise significantly throughout our forecast. This is mostly based on the continual improvement in streaming profitability as that business scales.

Read more about Walt Disney’s fair value estimate.

Economic Moat Rating

We assign Disney a wide moat based on its intangible assets. Ultimately, we believe the firm’s ownership of timeless characters and franchises that attract customers to its unique parks and cruises and enable it to create popular content that protects it in an evolving media industry and makes Disney vacations irreplaceable.

Although we think it’s likely that a media industry not built upon the traditional pay TV bundle will keep Disney’s entertainment and sports segments from returning to the level of economic profitability they achieved in the past, we still expect the firm’s returns on invested capital to comfortably exceed its cost of capital over the next 20 years.

Read more about Walt Disney’s economic moat.

Financial Strength

Disney is in good financial health and produces ample free cash flow. With the cash burn in its streaming business now in the past and the remaining stake in Hulu fully paid for, Disney’s balance sheet should continue improving as free cash flow remains well above the levels it achieved during the first several years of this decade.

Disney has the cash flow and financial flexibility to be an acquirer, but we don’t see sizable deals of interest. The firm has already been investing in its existing business at a heightened rate, so we don’t expect any further incremental investment to be material relative to annual cash flow.

Read more about Walt Disney’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Disney is Medium. The diversity of its business and reliance on parks and experiences warrant a lower Uncertainty Rating than traditional media peers. Television and streaming are the biggest sources of uncertainty, in our view. We expect linear TV networks to eventually go away as the historical form of the traditional pay TV bundle disintegrates. We expect Disney’s cable entertainment networks to become almost worthless eventually, while the ABC broadcast network will likely generate only a small fraction of its current sales if the traditional pay TV bundle dissolves.

We expect Disney+ and Hulu to thrive, but as with ESPN, we don’t believe they will ever be as lucrative for Disney as television networks were in their heyday. The extent of streaming success is another source of uncertainty. We believe occasional blackouts associated with carriage disputes with pay TV distributors represent only short-term noise as long as the traditional pay TV model exists, as we don’t believe the pay TV bundle can reasonably survive without ABC and ESPN.

Read more about Walt Disney’s risk and uncertainty.

DIS Bulls Say

• No peer can match the depth of Disney’s iconic characters, franchises, or content library, which will keep the firm’s streaming services in high demand and give the firm a leg up in creating new movies and television shows.
• Disney’s streaming services are moving from profit losers to major generators, while linear TV’s impact is moving rapidly in the other direction. This mix shift, with expanding streaming margins, will produce a major acceleration in firmwide growth.
• The allure of Disney’s experiences business is unmatched, and it will be a continuing profit engine.

DIS Bears Say

• Linear television will continue to decline. Even if successful, newer revenue sources like streaming will never equal the profitability Disney once enjoyed.
• Disney now competes with tech companies for major sports rights, who may have an incentive to continue driving up prices. Sports remains material to Disney’s future, and being forced to pay up for the critical content will depress profits.
• Too many streaming platforms now exist, and it’s questionable whether consumers will be willing to pay high prices or stick with individual services month in and month out.

This article was compiled by Irza Waraich.