DISNEY: THE ENCHANTMENT OF AI FOR THE MAGIC KINGDOM?

By Tejas Shankar, Equity Analyst 

The Walt Disney Company is one of the most recognizable brands in the world, yet the stock is valued as if its best days are behind it. This legacy entertainment company has been around since 1923, but has recently seen a lot of struggle. Over the Past 5 years, the company’s stock price has plummeted by over 40%, and its Price to Earnings Ratio or PE Ratio has dropped from trading at a 46 times multiple  3 years ago to now trading under 14, much lower than the industry average. On February 3rd, 2026, the company announced that Josh D’Amaro would take over as the new CEO of the company, effective March 18th, 2026, and in just over a month, the company’s mission became very clear: “One Disney”.

Disney has three primary segments that drive the majority, if not all, of the company’s revenue. The Entertainment Segment, which includes linear cable TV and direct-to-consumer content, as well as its Sports Division, is primarily composed of ESPN and its subsidiaries. Then all their theme parks, like Disneyland and Disney World, which we have all been to at some point in our lives, plus cruises, all fall under the experiences segment of the company.

A portion of the company’s Entertainment division includes its Sports arm, which houses ESPN, ESPN+, and all its associated services, such as betting and fantasy. ESPN individually has been having a rocky couple of years as cable viewership has dropped over 40% over the last decade. Shareholders have been calling for the company to spin off the brand to unlock value for both businesses individually. Though the company has still been trying to incorporate ESPN into the Disney brand as a whole, it has been an uphill battle as many big leagues have been increasing the cost for broadcasting rights. 

The interesting advantage that Disney has is how their business is like a flywheel. All parts of the business fuel demand for each other, and it is a never-ending cycle. Think about how all of us growing up watched our favorite Disney movies. We then all begged our parents to go to Disney World in the summer. Once we were there, we asked them to buy merchandise and try one ride or another. From there, we saw a new Disney character that we fell in love with and went home and watched that movie. The cycle would repeat. This is the advantage that Disney has. Their entertainment division fueled their experience division and vice versa, and this is the flow the company has been taking advantage of to gain revenue in the past and aims to take advantage of in the future.

A New King at the Magic Kingdom 

Disney’s CEO from 2005-2020 and then 2022-2026, Bob Iger, was an integral part of the company’s growth over the years, and assisted in multiple strategic turnarounds for the company, most recently in 2022 after the Pandemic. Though he still serves as a senior advisor after stepping down in March of this year, Josh D’Amaro is taking the reins of the company and is not shy to implement large cost-cutting measures. He just recently announced in a memo the layoffs of over 1,000 employees across a plethora of Disney’s media holdings. This is projected to create nearly $7.5 Billion in savings, but why? The company is doing well and has been on the up trend for a while. It’s due to the fact that the company is heavily pivoting towards experience intelligence, and the implementation of AI within their Studios is coming sooner than we may think. Thousands of creatives may simply be replaced by machines that can generate breathtaking images with the click of a button. 

Artificial Intelligence has been on the rise for the past couple of years, but many of us aren’t aware of how and where it can take over whole industries. As a matter of fact, Hollywood may be one of them, and many studios are jumping on the AI train before it leaves without them. Though the deal fell through, Disney had planned to close a $1B dollar deal with OpenAI to license over 200 of Disney’s characters for the company to use to train its AI video creation platform, Sora AI. With OpenAI shutting down the AI video creation platform, the deal fell through, but it showcases the role that AI has in the movie industry. The $1B deal would have been a very high-margin business that, if Disney were able to consistently get into, would allow the company to rake in revenue with little to no cost since the Intellectual Property(IP) of these characters is already created. There is no additional cost of licensing them out. This isn’t the only way that AI can be big for the growth of Disney. Having AI in the studios with movie productions can drastically revolutionize the Industry.

Artificial Intelligence in video creation is improving by the day and getting so good to the point that many of us are starting to really have trouble distinguishing between real and generated footage. AI-produced short films, videos, and trailers are starting to float out in the market and are as good, if not better, according to a few individuals, than real-produced content. If the technology can be developed and refined in a way that studios can use AI for background characters, props, sets, scenes, shots, and more, the costs of producing movies move from how much money is left in the budget to how many tokens we have left with this AI video generation software. This is a future that may be coming upon us in just a few years, and Hollywood movies that you and I will all enjoy will be created by a few actors and one AI team. Today, Disney’s blockbusters under the Marvel and Star Wars brands can cost as much as $500 million to make. What if the same quality content could be made for $10 million while the revenue produced by the film remained about the same? 

From Story Books to Accounting Books 

Now that we have a good understanding of how the company operates and some strategic advantages that they have, it’s time to dissect the books and go over a couple of key financials that support the bull case many investors have about Disney.

The forward PE of only 14.4x is down from over 46x over 3 years ago and is still below the industry average. For example, comparable streaming giant Netflix has a forward P/E of 29.2, over double Disney’s. If Disney just caught up with its peers, the share price could double. 

The company has also been very diligent in mitigating its debt, as they have brought it down from $48.5B in 2021 to under $39.5B, with a debt-to-equity ratio currently sitting at 0.32x. The company’s FCF of $8.6B is very strong, indicating that its cash flow can comfortably fund dividends, debt reductions, and any share buybacks if the company wishes. 

Disney isn’t known as a flashy dividend-paying stock, but for around 30 years before COVID (1990s-2020s), Disney had been paying a steadily growing dividend up to around $0.88 in January of 2020 and a maximum of $1.15 in January of 2015. After Disney had seen a lot of struggles due to the COVID-19 pandemic, the company strategically decided to stop returning capital to investors in the form of dividends and only continued to pay them back at $0.30 in January of 2024. Though disappointing for long-term investors, this move by the company goes to show the awareness that they have and the cost-cutting measures that they put in place when the company suffered a sudden drop in revenues. The pandemic led to little to no customers participating in Disney’s experience division, which included the numerous parks and cruises they owned. With the increased foot traffic in Disney’s parks and cruises post Covid, the company was able to recoup that aspect of their company’s losses and started paying dividends back to investors, though at a much lower payout ratio than before. Today, the company only pays out about 25% of its profit to shareholders; meaning that shareholders could easily see magical dividend growth for years to come.

So what does this all mean? Disney has the potential to be one of the most undervalued stocks out there on the market right now. It is a legacy entertainment company that has been struggling for the past 5-6 years due to a multitude of operational and strategic risks, but has made a very strong case for a comeback in the coming years. In the short tenure of Josh D’Amaro as CEO, the company has focused its strategy on experience intelligence and “One Disney,” returning to the flywheel business model that has been disrupted over the past couple of years due to the complications of the streaming industry. The company’s stock price has fallen over 40% over the past 5 years and is trading at a Forward PE of only 14x compared to the 20x of the S&P 500 average and more than half of its competitors, including Netflix. If the company can dial in its strategy and focus on utilizing AI, and stay a key player in the streaming oligopoly, the future is very bright for the company. Though they may not be a flashy AI company, the use of AI in Hollywood studios can allow for movies to be produced with very high margins and provide monumental upside, allowing Disney to surprise many.