Prediction: Disney Will Beat the Market. Here's Why

Over the very long term, the S&P 500 has generated an annualized total return of about 10%. This kind of gain is hard to argue with -- and over extended time periods, compounding can really make a big difference.

Investors who pick individual stocks most likely do so with the intention of trying to outperform the widely followed benchmark. This is no easy task. It's partly about choosing businesses that have favorable characteristics. It's also about having the right mindset.

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In the past five years, investing in Walt Disney (NYSE: DIS) would've ended up costing you 12.5% of your starting capital. That disappointing performance will make the following statement surprising: I predict that the House of Mouse will beat the market over the next five years.

The power of experiences

Investors might not realize that Disney's Experiences segment is its most important, financially speaking. Containing theme parks, cruise ships, and consumer products, this division accounted for 38% of the company's revenue in first-quarter 2025 (ended Dec. 28, 2024) and 61% of its operating income.

Just based on these two figures, you can easily tell how lucrative the segment is. It has many attractive qualities, like huge barriers to entry, a global presence, and pricing power. There's a lot of untapped potential. Management understands this reality.

In September 2023, Disney announced that the business would double its capital expenditures to $60 billion over the next decade to invest aggressively to expand the parks, add new attractions, and buy and build more cruise ships. If there's so much demand around the world, this seems like the smart move.

Hopefully, it can propel Experiences' impressive financial trajectory. Between fiscal 2012 and 2022, operating income at the segment increased at a 14% compound annual rate. If Disney can come close to repeating this kind of gain, it'll be a fantastic outcome.

No longer a drag on profits

Perhaps the biggest reason for Disney's poor stock performance is the sizable losses reported by its streaming segment in recent years. However, the direct-to-consumer (DTC) operations are ready to transition from a major headwind to a powerful tailwind. This could improve investors' attitudes toward the business.

DTC (including Disney+ and Hulu) has now posted two straight fiscal quarters of positive operating income. Executives forecast $1 billion in operating income for the current fiscal year. That's a massive improvement from the $1.5 billion peak operating loss registered in fourth-quarter 2022. Signing up more subscribers, implementing price hikes, and growing ad revenue are all contributing factors here.

No one argues with the fact that Netflix dominates the streaming landscape. But there's no reason Disney can't solidify the second-place position. It has unmatched intellectual property, top-notch studios, and the leading name in sports in ESPN, which is going to have its own flagship streaming platform starting this fall. These valuable assets all support Disney's economic moat.

Expectations are low

It's one thing to find a company that has some of the traits just mentioned, like an economic moat and increasing earnings power. It's another thing altogether to have the market offer up an opportunity to buy a business like this at a compelling valuation. But this perfectly describes the situation with Disney today.

As of this writing, the stock trades 55% off its peak from March 2021. It's been especially volatile in the past 12 months. In the last couple of months, the stock has dropped 19%, probably due to worries about how an economic slowdown and softer consumer spending will affect the company's performance.

Here's where it pays to be patient. Shares can be bought at a forward price-to-earnings (P/E) ratio of just 16.5, indicating low expectations that increase upside. Between now and 2030, I believe Disney stock will beat the S&P 500. The odds are stacked in the House of Mouse's favor.

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