Disney’s (NYSE: DIS) 5% year-over-year revenue growth and a 9% decline in operating income were driven by strong results in the areas most critical to the firm’s future: experiences, streaming, and sports. Entertainment profit outside streaming declined 55%, and negative free cash flow was mostly due to timing.

Why it matters: Linear networks and theatrical films account for most other entertainment and have little bearing on our view. Most importantly, experiences growth remains healthy; sports remains stable; and streaming margins continue to expand alongside growing sales.

  • Experiences sales grew 6% year over year, while operating margin held at 33% despite incurring costs for attractions that should accelerate sales growth next quarter and beyond. The segment accounted for 72% of operating profit.
  • Streaming sales grew 11% year over year, as operating margin expanded to 8% from 5% a year ago. Sports sales grew 1%, while the operating margin contracted 1 percentage point to 4% in the seasonally less-profitable fiscal first quarter.

The bottom line: We maintain our forecast and $120 fair value estimate. We believe Disney has a wide moat and an outlook for solid long-term growth, but near-term results have downside risk.

  • Management cited international tourism headwinds at domestic parks in guiding to only modest fiscal second-quarter experiences in operating profit. We’ve built this and other economic risk into our experiences forecast since last year, but we’d expect a continued stock selloff on further weakness.
  • We expect accelerating experiences sales and operating profit growth in the longer term. Disney will launch another cruise ship in March, and it is expanding at all its parks.

Between the lines: For the first time, Disney did not disclose the number of streaming subscribers it has or sales and operating profit from linear networks and content licensing, making it difficult to dissect what fueled the decline in entertainment operating profit outside of streaming.

Disney has successfully transitioned away from the shrinking traditional TV industry

With heavy investment and good execution in parks and experiences and streaming, Disney has transitioned its business so that the ongoing, swift decline in traditional pay television is no longer a critical threat to the company. Its diverse portfolio of successful businesses sets it apart from its traditional media peers.

With full ownership of Hulu to go along with Disney+, Disney has diverse streaming entertainment content and a global presence that positions it in the upper tier of global streaming platforms, with a global subscriber base we believe trails only Netflix and Amazon. More importantly, the firm has rapidly improved streaming profitability, swinging from a $2.5 billion operating loss in fiscal 2023 to a $1.3 billion profit in 2025. We expect that these streaming services will generate more profit for Disney than its linear entertainment networks in fiscal 2026, with streaming and linear entertainment each making up a midteens percentage of total company profit.

The linear TV medium is still important for ESPN, but with its rollout of a streaming alternative for linear ESPN programming, the ongoing demise of traditional pay TV won’t take ESPN down with it. We don’t view streaming ESPN as a material growth driver but rather see it as protection against a further decline in sports revenue, as consumers now have an alternative to access ESPN even when they no longer want the pay TV bundle. Sports also contribute a midteens percentage of total operating profit.

Experiences, which includes theme parks and cruises, remains a growth business and has consumed a heightened level of investment in recent years. With three cruise ships launching over about 16 months in fiscal 2025-26, Disney will have eight ships in operation, with another five in the works. A licensing arrangement for a Disney park in Abu Dhabi that should open around the turn of the decade provides further opportunity for incremental growth. This comes as Disney’s existing parks and cruises remain popular, and the intellectual property it owns ensures competitors can’t fully replicate Disney vacations.

Bulls say

  • 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.

Bears say

  • 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.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.