Is the box office back? Walt Disney (NYSE: DIS) seems to think so. The global entertainment giant is getting its mojo back at the movie theater with the release of Inside Out 2 from its Pixar subsidiary. It is the first movie to breach $1 billion in global box office sales for Disney since the COVID-19 pandemic and is already one of the top-selling animated movies of all-time.
However, box office success has not translated to Disney's stock price yet. Shares are down over the past month while the broad-market S&P 500 index is soaring. The company's stock has only posted a 23% return cumulatively in the last 10 years. The S&P 500 has posted a 240% return in that same time.
With its box office dominance returning and the stock still cheap, should investors scoop up some Disney shares below $100?
Top Pixar movie ever
Inside Out 2 is an animated film from Pixar that gives life to a child's conflicting emotions. It is a unique concept where families and kids around the world can relate to the emotional conflict inside the child's head. Perhaps surprisingly, the flick has become a global smash hit at the box office, generating around $1.36 billion in sales in just a few weeks, and it is still set to play in theaters until September.
This is already a record for a Pixar film and the fourth-most successful animated film ever. Soon, it should pass the Super Mario Bros Movie and reach third on the animated box office list. Among Disney movies, it has already cracked the top 10, beating hits such as Black Panther and Frozen.
It is unclear exactly where Inside Out 2 will land on the all-time lists when it finishes its box office run. What is clear is that the movie is one of Disney's biggest hits and should bring in a financial windfall over the next few quarters for its movie segment. But what does it mean for the business over the long term?
Translating to theme park and subscriber growth
Box office success is great for Disney, but there are two things that will drive this business over the next decade: theme parks and streaming direct-to-consumer (DTC) services. The good thing is, box office success can translate to success at these segments as well.
When Disney makes a new blockbuster franchise such as Inside Out , it not only makes money at the box office. The movie will now live (likely exclusively) on the Disney+ streaming service where kids can watch reruns as much as they'd like. Over the coming years, you can bet the franchise will get rides and other experiences at the various Disney theme parks around the globe.
A franchise doesn't start at the theme parks, but they are where Disney makes the most of its profits. Over the last two quarters, Disney's theme-parks segment has generated $5.4 billion of its total $7.7 billion in segment-operating income, which excludes corporate-overhead costs. DTC services are currently not profitable but growing sales by 14% year over year and will need to replace the revenue/earnings from linear cable TV networks.
Housing hits like Inside Out 2 can help grow this segment and Disney's overall profits in the coming years.
DIS Operating Income (TTM) data by YCharts.
Is Disney stock a buy?
If Disney can keep pumping out hits like Inside Out 2 , I have confidence the company will remain dominant among family entertainment over the next decade and beyond. Box office success translates to millions of fans of this new franchise, which translates to theme park visits, streaming subscribers, and toy purchases. And remember, Disney does not just have one family friendly franchise, but dozens.
After getting through the COVID-19 pandemic and marching through its transition from linear TV to DTC streaming, Disney's profits are starting to grow again. Over the last 12 months, its operating income has hit $10.5 billion, and that is without any impact from Inside Out 2 . If and when Disney's DTC business flips from losing money to generating cash flow, I think the company can easily clear $15 billion in earnings a year.
Today, Disney has a market capitalization of $180 billion as its stock sits at $98. While these earnings may not arrive for a year or two, Disney would have a forward price-to-earnings ratio ( P/E ) of just 12 if it can hit $15 billion in earnings. That looks cheap to me and makes the stock a buy if you believe in the company's continued profit inflection.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy .
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