This analysis was originally published as a stock note by Morningstar Equity Research.
Walt Disney DIS released its second-quarter earnings report on May 7. Here’s Morningstar’s take on Disney’s earnings and stock.
Key Morningstar Metrics for Walt Disney
- Fair Value Estimate: $120.00
- Morningstar Rating: ★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: High
What We Thought of Walt Disney’s Q2 Earnings
Walt Disney’s DIS fiscal second quarter was spectacular in virtually every aspect. Most importantly, experiences grew revenue and operating income 6% year over year, with even stronger results domestically, and management expects a stronger second half. Streaming continues to grow and become more profitable.
Why it matters: We’ve been concerned that an economic slowdown and strained relations between the United States and other countries would cause material downside pressure on Disney. We remain cautious about this, but management has seen little impact so far, and its outlook remains optimistic.
• Within domestic parks, management has seen very little headwind from reduced foreign tourism, and second-half bookings are up midsingle digits. For the full year, Disney now expects experiences operating income at the top end of its previous guidance for 6%-8% growth.
• In media, management said the advertising market is healthy right now, with live sports doing especially well. Going into advertising upfronts this month for the upcoming television season, Disney is seeing robust demand for advertising in linear and streaming.
The bottom line: Even after May 7’s 10% rise, we believe Disney is undervalued. However, despite the upbeat outlook, we still believe Disney’s near-term results—and its stock—will be very sensitive to economic conditions. We don’t intend to make a material change to our $115 fair value estimate.
Big picture: Beyond the near-term environment, the second-quarter report boosted our comfort in our wide moat rating, even as Disney’s traditional television business continues to decline. The firm’s franchises and characters support our moat, and we continue to see evidence of their contributions.
• The company announced a deal to bring a Disney park to Abu Dhabi with a partner, Miral. While financial details were sparse, Disney will contribute no capital but will get to oversee the park’s development, and it will receive service fees and royalties to allow use of its brands.
The Walt Disney Stock Price
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Fair Value Estimate for Walt Disney
With its 3-star rating, we believe Disney’s stock is fairly valued compared with our long-term fair value estimate of $120 per share. This includes our projection for a modest economic slowdown that dampens demand at Disney’s theme parks and other experiences in fiscal 2026. Our fair value estimate implies a P/E multiple of 23 times our trough 2026 adjusted earnings estimate.
We project entertainment linear networks revenue to decline in midsingle digits annually throughout our 10-year forecast, as pay-TV subscriptions and linear television ratings continue to decline, weighing on both subscription and advertising revenue. We are slightly more optimistic about sports linear networks, but we now expect sports linear and streaming to merge into a more cohesive offering, and we largely see ESPN’s flagship streaming offering—due in 2025—and pay-TV network to offset each other. We project sports revenue to grow about 3% annually throughout our forecast.
Read more about Walt Disney’s fair value estimate.
Economic Moat Rating
We assign Disney a wide moat based in its intangible assets. Ultimately, we believe the firm’s ownership of timeless characters and franchises and its ability to continue creating and attracting top-tier content outweigh near-term challenges it faces related to an evolving media industry. Although we think it’s likely that a media industry not built upon the traditional pay-TV bundle will prevent Disney from returning to the level of economic profitability it routinely achieved in years 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 sound financial health, even as the debt load and financial leverage are higher than they’ve been historically. Disney ended fiscal 2024 with nearly $40 billion in net debt and a 2.4 net debt/EBITDA ratio. These debt metrics took only a modest step backward in 2024 despite the firm paying roughly $10 billion to Comcast to cover the floor valuation to buy the remaining one third stake in Hulu. Though the firm may have to pay a few billion dollars more once the final Hulu valuation is settled, we expect financial leverage to continually improve beginning in fiscal 2025.
With the cash burn in its streaming business now in the past, Disney’s free cash flow should remain well above the levels it achieved during the first several years of this decade. The firm generated over $8 billion in fiscal 2024, and, despite heightened near-term investment, we anticipate a similar level in 2025 of free cash flow in 2025 and double-digits average annual growth thereafter.
Read more about Walt Disney’s financial strength.
Risk and Uncertainty
Our Uncertainty Rating for Disney is High. The evolution of the media industry that is currently taking place is the main factor behind our assessment. Outside of its experiences business, Disney historically had three main sources of revenue: fees that it received from pay-TV distributors to carry the Disney bundle of channels, television advertising, and licensing fees for movies and television programming distributed by third parties. Each of these revenue sources are now under pressure. Cord-cutting and diminished linear television viewership have depressed carriage fees and advertising revenue. Changes at the box office—from less attendance, fewer movies, and shorter theater windows—have been a headwind to licensing revenue.
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 will become a major driver of profits and offset linear declines. The existing DTC business has made a major turn to profitability, and the introduction of traditional ESPN as a streaming service in 2025 should fuel further demand.
• The allure of Disney’s parks business is unmatched and will be a continuing profit engine.
DIS Bears Say
• Linear television will continue to decline. Even if successful, newer revenue sources like direct-to-consumer streaming will never equal the profitability Disney once enjoyed.
• Disney now competes with tech companies for major sports rights, who may have 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 Jacqueline Walker.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
