Why Disney Stock May be a Worthwhile Investment Despite Current Valuation

Disney‘s Dilemma: Navigating the Transition to Streaming

Disney, a leading entertainment brand, is facing one of the biggest challenges in its history as it strives to transition from traditional cable and broadcast media to streaming. Despite the success of its Disney+ service, which has been well-received by consumers, the transition has been bumpy, with the streaming service affecting Disney‘s bottom line. Although the recent price increase and cost-cutting initiatives have helped curb losses, there is still much work to be done. With its direct-to-consumer segment reporting a loss of $659 million in the just-ended fiscal second quarter and the traditional linear networks business experiencing declining revenue and operating income, the company is finding it challenging to adapt to the streaming era.

The Sum of the Parts: A Possible Solution

One way to value a company with diverse business interests is by employing the sum of the parts approach, which involves breaking down each significant segment, valuing them independently and summing them up. Disney, with its vast business interests, including cable, broadcast networks, theme parks, resorts, cruises, and consumer products, operates in two main segments: media and entertainment, and parks, experiences, and products. While the media business is struggling, the parks segment is thriving, with revenue increasing by 17% and operating income by 23% in the second quarter.

Even including the corporate expense, the parks business generates around $1.5 billion in annual run rate operating income, which could be a reasonable valuation for the parks business alone. With excellent pricing power, name recognition, and revenue and operating income growth of roughly 20%, Disney‘s market capitalization of around $175 billion seems a reasonable valuation for the parks business. Though the media business isn’t free, it’s priced like a bargain given the strength of the parks segment.

Is Disney Stock a Worthy Investment?

The complete transition to streaming will indeed be challenging; however, it’s crucial for Disney‘s media business to return to its former peak profitability in the future. The profitable potential is there, mainly as movie attendance returns to pre-pandemic levels. While investors might be becoming impatient with the pace of recovery, Disney‘s stock is looking like a bargain, with the strength of its parks business and the potential of a media business transformation. The price hike at Disney+ has been absorbed with little resistance, and Disney may see further improvement in the bottom line with new ad tiers and cost controls.

Final Thoughts

Disney‘s challenge to transition provides an opportunity for investors willing to look beyond the company’s current struggles. With its vast business interests, and while not ignoring the challenges it faces, Disney presents a worthy long-term investment opportunity for those who believe in the potential of the media business recovery and the continued growth of the parks business.