Where Will Disney Stock Be in 3 Years?

In the past three years, the S&P 500 has generated a total return of 32% (as of Aug. 19). That positive outcome came about even with the troubling market drop in 2022.

But not all companies have performed as well. There's one that cut investor capital in half. I'm talking about Walt Disney (NYSE: DIS) , which has seen its share price drop 48% since Aug. 2021.

There might be better days ahead, though. As we look to the future, where will Disney stock be in three years?

Headwind to tailwind

The past few years have been difficult for this media and entertainment powerhouse, particularly when it comes to Disney's streaming operations. Disney has been investing heavily in content creation and in developing technological capabilities to get Disney+, launched in November 2019, off the ground. As a result, the financials took a hit.

Between fiscal 2018 and fiscal 2023, Disney's segment operating income decreased by 18%. The business was feeling pressure on the income statement as it tried to attract subscribers to its direct-to-consumer (DTC) services.

But this headwind is starting to turn into a tailwind. In the most recent fiscal quarter (Q3 2024 ended June 29), the DTC segment (including Disney+, Hulu, and ESPN+) generated its first-ever operating profit. With the company cutting costs and raising prices, rising income in this segment should boost Disney's bottom line. Executives see adjusted diluted earnings per share soaring 30% this fiscal year.

Looking out to 2027, it's reasonable to assume that the DTC segment could start generating billions in operating income on an annualized basis. With multiple services that can cater to the needs of every member of a household, Disney is in a prime position to have a thriving bundled offering that brings in more customers, increases viewership, reduces churn, and has pricing power.

Disney's other segments

Streaming undoubtedly gets all the attention, as it's Disney's biggest growth engine. However, investors shouldn't forget two other vastly different business lines that can impact the company's performance.

Disney's linear channels, namely ABC and ESPN, are certainly facing pressure from fewer households keeping their cable subscriptions. But these networks are still incredibly profitable with a Q3 operating margin of 37%. Even if revenue declines in the low-single-digit range for the next several years, a lot of money remains to be made.

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

Therefore, I'm extremely confident that Disney will report higher revenue 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 the way this one is. Cable TV is a declining industry, but streaming entertainment is the present and the future. It doesn't help when profits have declined due to this industry transition taking place.

The market's downbeat perspective is reflected in the stock price. Shares trade at a forward price-to-earnings (P/E) ratio of 18, about the cheapest they've been in the past three years.

The positive view is that Disney is certainly a competitively advantaged business with all the tools to see its earnings rise meaningfully in the years ahead. I believe that the latest quarter is a clear first step in the right direction, most notably when it comes to streaming.

Add the bottom-line gains to what should be an expanding valuation multiple, and I think Disney shares can outperform the broader S&P 500 over the next three years.

Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy .