Disney

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.

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

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.

Sports revenue was up 4.5% year over year, but the operating margin compressed by 5 percentage points, which was mainly due to the new NBA contract. Results were also dampened by short NBA playoff series, which eliminated some advertising opportunities. The firm still expects operating income growth for fiscal 2026. Beyond disclosures about the content being integrated into the ESPN streaming service, we have gotten little detail about it or the financial contribution it is making. If it simply prevents the sports segment from declining, which we expect, we think the segment is in good shape.

Excluding streaming and the Fubo acquisition, we estimate entertainment revenue was down about 4%, very respectable considering that content licensing was down 6%. Higher rates on television networks led to outperformance, but we expect this business to remain in perpetual decline. We estimate the entertainment margin excluding the streaming services expanded by 370 basis points, but this is not adjusted for the Fubo transaction.

Our fair value estimate for Disney is $125, 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. We believe experiences revenue can grow at a high-single-digit normalized clip, but we've brought our near-term estimates down slightly in recognition that this business is especially sensitive to the economy. We project experiences operating income to rise at a mid-single-digit pace, on average, throughout our forecast. With several additional cruise ships and the expansion of parks, we believe there are substantial opportunities for sales growth that can come without relying solely on price increases or higher spending within parks.

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. We believe there is room to continue adding subscribers, and we expect average revenue per user to trend up through periodic price increases and higher advertising revenue. However, we expect a competitive market with multiple streaming services, and we believe Disney will remain sensible with pricing as it focuses on profitability, which is why we don’t project bigger subscriber gains. In the US, we project the Disney+ and Hulu subscriber bases to remain smaller than Netflix’s. We believe there is room for more upside if these streaming services move into a bundled package with other streaming services or additional pay TV subscriptions, but that outcome would weigh on average revenue per user. Nonetheless, through reduced churn and the potential to better salvage linear networks, we think the move would be wise.

Excluding streaming, we project sales and profits in the entertainment segment to decline slightly each year over our forecast period. We expect theatrical revenue to be choppy but grow in the low single digits, on average. We don’t expect theatrical growth to be enough to offset the demise of linear entertainment networks, where we anticipate revenue declining at a high-single-digit compounded annual rate throughout our ten-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, and we also believe the ESPN streaming service can offset the headwind that comes from the ongoing decline in pay TV subscribers, which will shrink linear ESPN revenue. We project sports revenue, which includes the family of ESPN networks and streaming services, to grow by 1%-2% annually throughout our forecast period.

We project consolidated margins to expand and free cash flow to rise significantly throughout our forecast. This is based mostly on the continual improvement in streaming profitability as that business scales. We project the firm’s operating margin to under 15% in 2025 to 18% by 2031 and 20% by 2035, as experiences margins expand on new attractions and licensing arrangements. We project content spending to reach $24 billion in 2026, with further growth each year, as we believe the firm must continue spending to offer attractive programming and retain sports rights. However, cost efficiencies and leverage we expect the firm to get from growth in its streaming platforms result in free cash flow rising from our projected $10 billion in 2026 to $14 billion by 2030.

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 make 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.

Depressed returns on invested capital in the early 2020s are related to a confluence of factors that have now either disappeared or are becoming less consequential. The pandemic depressed Disney’s parks and experiences earnings for several years. At the same time, Disney was investing heavily to expand its experiences business—building new cruise ships and expanding parks. The decline of traditional TV muted overall revenue growth, and the creation and buildup of streaming services further dampened profits. However, linear TV has become a much smaller share of total profits and is moving toward irrelevance, while streaming is finally taking the mantle after those businesses initially produced sizable losses. Disney has shifted from profit declines in a large legacy business (linear TV) and heavy losses in the business of the future (streaming), to rapid profit growth in streaming. Linear has become a small part of the overall pie.

The intangible assets that underpin Disney’s moat include the intellectual property behind franchises and characters that have proved enduring across generations, ESPN’s position in the sporting world, and the multiple television and movie production studios Disney has. The interaction among these assets benefits all of the firm’s business lines and makes the whole stronger than the individual parts. We don’t see any competitors that are close to having the type of built-in pipeline Disney has to attract consumers.

We believe Disney’s experiences segment, which consists mostly of theme parks and other vacation-related revenue streams, has the most durable advantage. Disney characters are iconic, and we think it would be nearly impossible for new competitors to offer destinations that are as attractive. No firm can replicate exactly what Disney can offer due to the intellectual property and characters on which Disney bases its experiences. Those who at least want to offer a similar concept face several barriers. Securing and building the infrastructure is one challenge, but even competitors that undertake that challenge cannot match the depth of familiar and popular characters to drive similar interest and pricing power. We see NBC Universal as the competitor that most closely rivals Disney, but not only do we think it’s a distant second, we doubt it can significantly close the gap. It has far fewer attractions than Disney does, and the time and investment it has put behind adding Epic Universe to its Universal Orlando Resort highlights the lift that matching Disney’s scale entails. Disney’s characters and franchises also drive licensing revenue on consumer products, a high-margin source of continuing revenue. In short, Disney can provide a type of experience that we expect will drive consistent demand, and its offering for that type of experience is unique and best in class.

Streaming, film, and TV studios all have advantages that probably would not warrant a moat on their own, but they also benefit substantially from Disney’s franchises and intellectual property that give them a leg up on competitors. In streaming, Disney continues to hold premier content and has the highest likelihood among all competitors of creating and maintaining a pipeline of the highest-quality programming. Over the long term, the ability to generate or attract the best content makes economic profitability highly likely.

Linear networks no longer support a moat, but we expect the ESPN brand can make the transition to streaming. ESPN is a leader in sports content and reputation, giving it immense bargaining power and near-universal carriage for as long as the pay TV bundle lasts. It is also, therefore, a destination for the most high-profile sports rights and peripheral sports content, which will ensure that sports fans will need ESPN, whether through pay TV or its streaming app, for years to come, even though the exposure ESPN can provide is now less of a differentiator than it once was. The NFL’s investment in 2026 for a 10% stake in ESPN highlights ESPN’s importance, differentiation, and staying power.

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 will be a continuing profit engine.

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 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.