Where will Disney stock be in 3 years?

In the last three years, S&P 500 generated a total return of 32% (as of August 19). This positive result came even with the market’s worrying decline in 2022.

But not all companies performed equally well. There is one that cuts investors’ capital in half. I’m talking about Walt Disney (DIS -0.88%)which has seen its share price decline by 48% since August 2021.

Better days may be ahead, though. As we look ahead, where will Disney stock be in three years?

Head to tail wind

The last few years have been difficult for this media and entertainment powerhouse, especially when it comes to Disney’s streaming operations. Disney invested heavily in content creation and developing technology capabilities to launch Disney+, which launched in November 2019. As a result, the financial situation took a hit.

Between fiscal 2018 and fiscal 2023, the Disney segment’s operating income fell 18%. The company felt pressure on its profit and loss account as it tried to attract subscribers to its direct-to-consumer (DTC) services.

But this headwind is starting to turn into a tailwind. In its most recent fiscal quarter (Q3 2024 ended June 29), the DTC segment (including Disney+, Hulu and ESPN+) generated its first operating profit. Along with cost cutting and price increases, revenue growth in this segment should boost Disney’s bottom line. Directors see adjusted diluted earnings per share growing by 30% this fiscal year.

Looking ahead to 2027, it is reasonable to assume that the DTC segment could start generating billions in operating revenue on an annual basis. With multiple services that can meet the needs of every member of a household, Disney is in a prime position to have a thriving offering that will attract more customers, grow audiences, reduce churn and have the power to set prices.

Disney’s other segments

Streaming is undoubtedly getting all the attention because it’s Disney’s biggest growth engine. However, investors should not forget two other very different lines of business that can affect the company’s performance.

Disney’s linear channels, namely ABC and ESPN, are certainly facing pressure from fewer households retaining their cable subscriptions. But these networks are still incredibly profitable with a Q3 operating margin of 37%. Even if revenues fall into the low single digits for the next few years, there’s still plenty of money to be made.

On the other hand, theme parks are poised to be a key driver of growth, as has been the case historically. Management showed some weakness last quarter, with sales up just 2% in the experiences segment. But plans are in place for invest $60 billion over the next decade to add new attractions and improve the guest experience.

Therefore, I am extremely confident that Disney will report higher revenues and earnings from its parks, resorts, cruise ships and consumer products three years from now and beyond.

Expectations are low

Investors clearly don’t like it when a business goes through changes like this. Cable TV is a declining industry, but streaming entertainment is the present and the future. It doesn’t help that profits have fallen because of this transition in the industry.

The unfavorable market outlook is reflected in the share price. Shares are traded at a forward price-earnings (P/E) ratio. of 18, about the cheapest they’ve been in three years.

The upside is that Disney is certainly a competitively-advantaged business with all the tools to see its earnings grow significantly in the coming years. I think the last quarter is a clear first step in the right direction, especially when it comes to streaming.

Add the underlying earnings to what should be an expanding valuation multiple, and I think Disney stock can outperform the broader S&P 500 over the next three years.