The happiest company on Earth, also perennially misunderstood.

When I first purchased shares in Disney, back in 2016, the narrative was all focused-on cord-cutting at ESPN. Since that time, it has shifted frequently. COVID, the streaming wars, governance issues and now the impact of AI on the entertainment industry. 

However, during this whole time, there has been an underlying truth.

Disney is a company whose history spans more than 100 years, during which time it has overcome numerous structural shifts, macroeconomic events and other issues. Not only has it overcome those issues, but it has usually come out ahead and is still one of the most admired brands in the world, the leading entertainment company, one of the most innovative companies in its industry and a company whose portfolio of intellectual property is unrivalled anywhere else in the world.

My Narrative

Disney is a company that has over 100 years of excellence and has weathered all the storms that it has come across over this history. Despite this, investors continue to get caught up in structural shifts happening in the wider industry, despite Disney's history of successfully navigating these trends and coming out of it better due to their superior brand, assets and intellectual property. 

Disney is a high-quality and innovative company with a proven record of benefitting from disruption, which has been consistently priced as if it were an aging dinosaur. It isn't. Instead, I believe it's undervalued, and once the latest "concern" is crossed out, its share price will start to rise again.

The Business

Founded in 1923 by Walt Disney, the company today is an entertainment powerhouse whose empire spans film, theme parks, cruise ships, retail and sports.

Disney Entertainment

Disney Entertainment comprises the diverse portfolio of media businesses spanning film, television and music, including Walt Disney Studios, Walt Disney Animation, Marvel, Lucasfilm and Pixar, as well as its ownership of streaming platforms, Disney+ and Hulu, amongst others.

The entertainment business is built around creating engaging storytelling and media content which can be licensed off, exhibited in cinemas and theatres or housed on its various streaming platforms.

Recently, the biggest driver has been streaming -- most notably through Disney+ and Hulu. These businesses charge a recurring subscription fee, which gives viewers access to an entire library of content. While it is undoubtedly where the industry is heading, it has been a challenge for media companies to generate a profit as many focused on acquiring subscribers and building scale through low price points. This has been changing, and Disney is evidence of this by both increasing subscription prices and introducing an advertising tier, which also helps diversify its revenue base from these companies.

Streaming will continue to be the major growth driver.

There is a concept called the directional arrow of progress, where an industry shifts in a straight line in a particular direction, which will never be reversed. Streaming is entertainment's directional arrow of progress. Cinema attendance has been in decline since around 2016, as more choose to watch from home than pay high prices to watch in theatres. Also, as technology has improved, more people are cutting the cord to cable and other forms of media. Streaming platforms, such as Disney+, offer the choice, freedom and convenience that the market craves. This isn't going to change; the winners will be those who build scale and offer the right quantity and quality of content that keeps those subscribers rather than churning them out. Given that Disney's SVOD subscription revenue increased 13% in the latest quarter is proof that Disney are doing a good job building such a platform.

Disney Experiences

Disney Experiences, formerly known as parks and resorts, comprises the company's iconic theme parks as well as its cruise lines, retail and other associated businesses.

Outside of COVID, where the parks' businesses were shut down completely, the assets in the experiences division, especially its parks and resorts, have been the overlooked crown jewel in the Disney business.

The theme parks act as a living embodiment of their intellectual property, allowing people to enter and live out their famous stories. Despite the perfectly crafted worlds and attractions and the barriers to prevent guests from seeing the outside world, the business model is simple. The parks, hotels and cruise ships are properties built on high fixed costs; if you can increase attendance or the average revenue per guest, then profit should increase. Of course, there are capacity constraints.

The key challenge here is keeping things fresh and attractive to encourage continuous high attendance or occupancy -- although, given the value and level of reverence of Disney's brand amongst people, this is less of a problem than other theme park or hotel companies.

To help drive further growth in this business, Disney is investing heavily in adding new attractions, and in some cases, entire lands, such as the rumour that the proposed Villains Land at its Orlando property might be scaled up. The company is also planning to significantly increase the number of cruise ships in its fleet. This should help not only continue to make Disney's parks and cruise ships the leaders in its industry but also generate significant revenue growth through higher ticket prices and average spending per customer. It is also currently in the works of planning another theme park to open in Abu Dhabi along the lines of its arrangement with the Oriental Land Company in Tokyo, where the park will be owned by a third party, in this case, Miral Group, with royalties paid to Disney, who would help design and consult on the project. It's an innovative structure that allows Disney to extend its reach, add new parks, but do so with little to no financial risk.

ESPN

ESPN is one of the leading sports broadcasters in the world.

Through its cable channels and its streaming platform, ESPN+, it is one of the main sources for sports lovers to view their favourite events around the world, predominantly in America, to view and enjoy their favourite competitions.

The business model of ESPN revolves around purchasing the exclusive right to broadcast sporting events. This is an industry with barriers to entry, as sporting rights are increasingly becoming more expensive, and the sports administrators want scale to reach as many people as possible. Few do this better than ESPN. They then make a profit by charging affiliate fees to cable providers, of which ESPN can extract the highest fee in the industry, or through subscription fees to its streaming platform, as well as advertising and other ancillary revenue. Again, like many of Disney's businesses, the model is built around taking a fixed cost and building as much scale and reach as possible to generate a healthy, growing profit on the back of strong IP, in this case, the world's most popular sporting competitions.

Management

Earlier this month, Disney announced that Josh D'Amaro will become the latest chief executive of The Walt Disney Company, succeeding Bob Iger's second reign. Despite Disney’s 100-year history, he will become only the 9th chief executive of The Walt Disney Company.

D'Amaro has a tough act to follow.

Bob Iger will forever have his place on the Mount Rushmore of Disney leaders. He fundamentally transformed the business through extremely successful acquisitions and technological innovation.

There is also more pressure on D'Amaro, given how Disney's last attempt to replace Iger went down -- where Bob Chapek was eventually terminated from the position due to a series of events that harmed the brand, and rumoured sniping from the sidelines by Iger himself.

D'Amaro is also one of the first leaders to have come from the parks side of the business instead of the entertainment business, as the ability to manage the creative side of entertainment has always been seen as an advantage with the latter. But D'Amaro could be exactly the leader Disney need right now.

Firstly, he is incredibly popular with Disney fans. He is arguably the most well-known and popular leader of the Disney business amongst Disney enthusiasts after Iger, having stood for years in front of the company's passionate theme park fans at events like D23, where the company would announce upcoming plans for park expansion, amongst other items. Given Iger's legacy as one of the great leaders of the company, hiring D'Amaro means that there is a person helming the company that the fans already like and trust -- something that wasn't the case with Chapek, who was considered cold and just focused on the numbers.

D'Amaro has also been taking the lead with the company's experimentation with technology and digital expansion.

This is likely to be the legacy he looks at leaving the company, and arguably the thing that helped tip the scales towards him over his colleague, and new president and chief creative officer, Dana Walden.

“We are 100 years old, but we’re 100 years young as well, willing to embrace new technology, new creators and new markets”, D'Amaro told a recent town hall with the company's large employee base.

This is true. Disney has always been an innovation leader ever since Walt pioneered full-length, colour, animated films, new sound systems and other technology, as well as reinventing the theme park industry and helped finance it by embracing a new medium called television. Iger continued this when he asked, as detailed in his book, for plans on how to disrupt themselves to make sure they stay current with industry trends, most notably streaming.

Disney's portfolio of intellectual property is largely the characters and stories that have touched and entertained millions over its hundred-year history. But how to take advantage of this in the rapidly changing digital world has been D'Amaro's responsibility to solve.

One of the first major deals was a $1.5 billion investment and partnership with Epic Games -- the creator of Fortnite and owner of one of the best gaming engines that is increasingly being used across the industry.

In the short term, this meant the introduction of events and characters into the popular battle royale game. But longer term, it is focused on building an immersive world where people can interact with its stories and characters outside of its theme parks. This is an opportunity that very few of its competitors can consider, let alone take advantage of, given their IP lacks the emotional and cultural cache of Disney.

The other key technological shift that D'Amaro has been a part of has been the company's acceptance and entry into the world of AI.

On top of investing in small AI-driven entertainment companies, the biggest step has been the $1 billion investment and partnership deal with OpenAI. This will allow users of OpenAI's platforms, like SORA, to make short-form content (within certain rules and guidelines) using some of Disney's famous characters. This arguably makes Disney one of the leading and most powerful advocates for how AI will shape the entertainment industry, which should allow it to help drive the industry towards a place that benefits it.

With technology being the latest concern point for investors, the fact that Disney's new CEO has been one of the driving forces of technological disruption in the business, as well as having meaningful stakes in two of the most innovative and powerful technology companies (in Epic Games and OpenAI), means that this is actually a strength rather than a weakness.

Risks

On top of regular risks such as competition, tough macroeconomic conditions and the ever-present risk of poor performance at the box office, other key risks I'd like to discuss.

Ongoing Structural Shift of Streaming

In his book, The Hollywood Economist 2.0, Edward Jay Epstein discusses the concept of replacing analog dollars with digital pennies. In short, while the streaming business is what customers want, it is significantly less profitable than the old cinema-to-dvd model.

This is still the case and is still something companies like Disney are trying to work out.

Disney has a goal of generating an operating margin this financial year from streaming of around 10%, which is around half of what Netflix generates. This shows both material upside in this growing and important business, but a sign that it is still not the leader in this field. With increased competition from streaming, this is an area that still requires significant investment and may not generate the required ROI.

Management Uncertainty

The last time Disney tried to replace Bob Iger, it didn't go well. This is not the only time that succession has been an issue. Bob Iger's ascension to CEO came after another difficult changeover, when Michael Eisner resigned -- a time thoroughly explained in the book Disney War by James Stewart. 

People who have studied Disney might also be aware that when the company has not been run by a "creative" CEO, it has struggled. Disney is not a business that thrives under ruthless operators. Its fans demand not just the best, they demand the magic the company has been built upon. If they feel things are being run to maximise profits by being cheap, things can get nasty very quickly.

Josh D'Amaro, and his new partner, Dana Walden -- who also had strong claims for the CEO position so might be smarting a little bit that she wasn't the one with the title despite putting forward a supportive face -- will need to navigate hot to make the company there own, while ensuring that the company and its brand is unharmed in an age of unprecedented technological disruption all while trying to escape the shadow of Bob Iger.

Nobody knows whether they will succeed. But it's unlikely Bob Iger would return a third time to bail out the company again if it fails.

Political Impact on Tourism

With an increased focus on immigration by the Trump Administration, international tourism to America has been impacted negatively. This is likely to impact the short-term attendance of its domestic theme parks.

The longer this goes, the more of an impact this will have.

We also have previously seen, in the case of the "Don't Say Gay" bill in Florida, which brought Bob Chapek and Disney into a war with Florida's governor, Ron DeSantis, that there is almost a desire from some on the conservative side of American politics to go to war with a company like Disney. In Florida, it led to the company losing its control of the Reedy Creek Improvement District, now the Central Florida Tourism Oversight District. There were also threats around this time of stripping copyright protection on some of Disney's intellectual property. In December 2024, Disney settled a defamation lawsuit with Donald Trump for $15m , which was filed by the president after he was aggrieved with reporting by its ABC News division.

While for some companies, the decision to placate and curry favour from the president is a simple decision due to their profit focus, Disney's brand, which is built on happiness, fairness, equality, means that they are held to a higher standard -- which is how the Florida situation blew up as Chapek wanted to take a silent approach but Disney fans and employees forced action.

Disney must tread carefully, as any step into the wider political spectrum would either alienate it with its fans and customers or with the US president.

The Threat of AI

While Disney has forged a partnership with OpenAI, invested in AI companies and is looking into how it could benefit the business, it also comes with threats -- most notably in the breaches of copyright and intellectual property.

While Disney has partnered with some firms, it has also launched lawsuits against others for copyright infringement. This highlights one core risk from AI. If Disney's biggest asset is intellectual property, what does that mean in the future, where intellectual property protection is being eroded away by AI.

Given Disney's reputation for quality and storytelling, I do not believe this is a massive threat, as its content will tend to stand out, and its name and characters mean something more than just entertainment. But it is something to watch.

Conclusion

There are concerns from the market regarding structural shifts that are occurring in Disney's core markets. But this is not a new thing, and the company has not just overcome those threats but thrived after innovating to deal with them. This is likely to be the case in the future.

With world-class assets and plenty of growth remaining in its core businesses -- parks, cruise ships and streaming -- the future is brighter than the market is giving Disney credit for, and therefore, the existing narrative is incorrect. 

I believe it is undervalued.

(The author owns shares in Disney.)