Disney Stock Is a Buy Today

Bulls Say

• The parks and resorts segment should rebound strongly from the pandemic as families still view the parks as a prime vacation destination.
• Disney+ has a long runway for growth available in the U.S. and internationally. Original series and the deep and constantly expanding library will drive the growth.
• Although making movies is a hit-or-miss business, Disney’s popular franchises and characters reduce this volatility over time. Additionally, the company’s annual slate does not generally rely on one big picture, reducing the downside from a flop.

Bears Say

• The business model for the media networks division depends on the continued growth of affiliate fees. Any slowdown in the growth of these fees as pay-TV subscribers continue to decline could tremendously hit profitability.
• The streaming space is becoming increasingly crowded. Disney may need to continue to fund losses at this segment beyond fiscal 2024.
• Developing mass-market hit programs can be unpredictable, especially as media fragmentation continues. Attracting and retaining talented creatives has been and will remain very competitive and expensive.

Morningstar Analyst Neil Macker Says

We believe Walt Disney DIS is successfully transforming its business to deal with the ongoing evolution of the media industry.

Direct-to-consumer efforts—Disney+, Hotstar, Hulu, and ESPN+—are taking over as the drivers of long-term growth as the company transitions to a streaming future. The streaming will benefit from the new content being created at Disney and Fox television and film studios as well as the deep libraries at the studios. We expect that Disney+ will continue to leverage this content to create a large, valuable subscriber base.

Disney’s media networks segment includes ESPN, ABC, and the acquired Fox cable entertainment channels like FX. ESPN remains the dominant domestic sports television network thanks to its wide array of sports programming. It profits from the highest affiliate fees per subscriber of any cable channel and generates revenue from advertisers interested in reaching adult males ages 18-49, a key demographic. The Disney Channel’s programming consists of internally generated hits with Disney’s vast library of feature films and animated characters. We expect the unique content on ESPN and Disney Channel will provide the company with a softer landing than its peers as viewing transfers to an over-the-top world over the next decade.

The company’s other components rely on the world-class Disney brand, sought after by children and trusted by parents. Over the past decade, Disney has demonstrated its ability to monetize its characters and franchises across multiple platforms: movies, home video, merchandising, theme parks, and even musicals. This stable of animated franchises will continue to grow as more popular movies get released by the animated studio and Pixar. Disney has arranged the Marvel Cinematic Universe to create a series of interconnected films and product tie-ins. With the acquisition of Lucasfilm, the company has positioned the Star Wars franchise in the same manner. Disney’s theme parks and resorts are almost impossible to replicate, especially considering the tie-ins with its franchises and other business lines. We expect the parks to rebound as capacity limits are lifted, since families will still view the parks as a prime vacation destination.

Key Proprietary Morningstar Metrics

• Fair Value Estimate: $170
• Star Rating: 5 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable