Navigating the Magic: A Deep Dive into Disney’s Earnings

The Walt Disney Company (DIS) released its first-quarter earnings for fiscal 2026 this morning, revealing a company in the midst of a transformation and one that’s soon to have a new CEO as well with Bob Iger set to retire at the end of the year. While the headline figures showed revenue growth and a blockbuster year for the film studios, the market response remained cautious sending the stock down about 5%, continuing a multi-year struggle to regain the stock’s former glory.

The Numbers: Blockbusters vs. Bottom Lines

For the quarter ended December 27, 2025, Disney reported financial results that were mixed.

Key Financial Highlights:

• Revenue: $26.0 billion, up 5% from $24.7 billion in the prior-year quarter.
• Diluted EPS: $1.34, down from $1.40 last year.
• Adjusted EPS: $1.63, a 7% decrease compared to $1.76 in the prior year.
• Total Segment Operating Income: $4.6 billion, a 9% decline from $5.1 billion.
• Free Cash Flow: A negative ($2.28) billion, primarily due to the timing of tax payments and increased capital expenditures in the Experiences segment.

Performance vs. Estimates

While revenues slightly beat consensus expectations of roughly $25.8 billion, the Adjusted EPS of $1.63 landed toward the lower end of some analyst forecasts. The market was particularly sensitive to the 9% drop in total segment operating income. Management attributed much of this decline to higher programming and production costs in the Entertainment segment, perhaps a result of having more movies in the quarter (nine releases vs. four last year) which front-loads marketing and amortization costs.

Segment Analysis: Where the Growth Is (And Isn’t)

1. Entertainment: The Studio Renaissance

Disney’s film studios had a historic calendar year in 2025, generating over $6.5 billion at the global box office. The quarter was headlined by Zootopia 2, which earned a staggering $1.7 billion, becoming the highest-grossing animated film of all time. Avatar: Fire and Ash also crossed the $1 billion mark during the quarter.

However, the cost of success weighed on the segment’s operating income, which fell 35% to $1.1 billion. The surge in theatrical releases required massive marketing spend, and the consolidation of the Fubo transaction added complexity to the balance sheet. Still, these successful releases should have benefits down the line as some of the profits from these movies will fall into Q2 and they should drive subscriber growth once they hit Disney+.

2. SVOD: The Path to 10% Margins

Direct-to-Consumer (DTC) remains the focal point of the bull case. Entertainment SVOD (Disney+, Hulu, and Hotstar) saw revenue grow 11% to $5.35 billion. More importantly, SVOD operating income jumped 72% to $450 million.

Management reaffirmed their target of a 10% SVOD operating margin for the full fiscal year 2026. This is a significant milestone, considering that just three years ago, the streaming business was losing billions of dollars per quarter.

Looking at Netflix, when they were in that $20B a year revenue range, they had operating margins in the 10-12% range and that number grew pretty quickly as they gain scale. Netflix was growing much faster at that point but this does show the potential margin improvement for Disney as their SVOD business gains scale.

3. Sports: The ESPN Evolution

ESPN remains the preeminent digital sports platform, but it faced a tough comparison this quarter. Segment operating income fell 23% to $191 million. This was largely due to a $110 million adverse impact from a temporary carriage dispute with YouTube TV and higher rights costs for the NBA and college football.

The big news in Sports was the closing of the NFL transaction, which brings the NFL Network and RedZone under Disney’s umbrella. This is a strategic move to bolster ESPN Unlimited, Disney’s standalone flagship DTC sports service.

4. Experiences: Record Revenue

The Parks and Experiences segment hit a milestone, exceeding $10 billion in quarterly revenue for the first time. Operating income grew 6% to $3.3 billion. Domestic parks saw an 8% increase in OI, driven by higher guest spending (up 4%) and the launch of new cruise ships, the Disney Treasure and Disney Destiny.

Why Is the Stock Still Struggling?

Despite the record-breaking films and the profitability of streaming, Disney’s stock has remained largely range-bound over the last three years, significantly underperforming the S&P 500. There are several reasons for this gap:

1. The Linear Decline: While streaming is growing, the legacy linear television business continues to bleed subscribers. The Sports segment’s 4% decline in subscription revenue (excluding Fubo) is a constant reminder of the cord-cutting headwind. Disney is being more vague around how they report linear TV numbers tying it all into their entertainment sector but the reality is that this is a high margin cash cow that is causing issues with their bottom line growth.
2. Free Cash Flow Volatility: The negative free cash flow this quarter ($2.28 billion) was a shock to some, even if it was explained by tax relief timing. Investors want to see consistent, predictable cash generation. Still, the company continued to guide for operating cash flow of $19B for the year.
3. Capex Intensity: Disney is turbocharging its Experiences segment with $60 billion in planned investments over the next decade. While this promises long-term growth, it requires massive upfront capital, which some investors view as a drag on near-term returns.
4. Succession Uncertainty: CEO Bob Iger is nearing the end of his extended term. While he has fixed much of the balance sheet, the question of who comes next and how do they drive the next wave of growth continues to weigh on investor sentiment.

Management Q&A: AI, Sora, and the One-App Future

The conference call featured a spirited discussion about the future of technology at Disney. Two major themes emerged:

1. The OpenAI/Sora Partnership

Bob Iger spent considerable time discussing the new 3-year licensing deal with OpenAI. Disney will allow users to use the Sora AI tool to create 30-second videos using 250 of Disney’s most iconic characters (excluding human faces/voices to protect actor IP).

Iger views AI not as a threat, but as a tool for “Creativity, Productivity, and Connectivity.” By integrating user-generated AI content into Disney+, the company hopes to tap into the YouTube effect, engaging younger audiences who crave short-form, interactive content although they run the risk of lowering the quality of content on their platform as well.

2. The Integrated Unified App

Management confirmed that the full integration of Hulu and Disney+ into a one-app experience is on track for the end of the calendar year. This move is designed to reduce churn (which is already lower for bundled subscribers) and improve the recommendation engine using AI to personalize the home screen.

Outlook for FY 2026

Disney provided a clear, albeit back-half weighted, roadmap for the rest of the year:

• Q2 FY2026: Entertainment segment OI is expected to be comparable to the prior year with SVOD OI expected to hit approximately $500 million. Sports will see a $100 million decline in OI due to higher rights expenses. On the Experience side, the crown jewel of the company right now, the company is only expecting modest operating income growth due to softness in international visitors at their domestic parks and pre-launch costs for certain new investments.
• Full Year FY2026:
  • Double-digit Adjusted EPS growth (weighted to the second half) with Experiences growing OI in the high single digits.
  • $19 billion in cash provided by operations.
  • $7 billion in stock repurchases (the company already bought back $2 billion in Q1).
  • Entertainment: Double-digit OI growth for the full year with SVOD margin of 10% for the year. Sports will see low single digit OI growth due to higher sports rights costs.

Valuation: Is Disney a Good Value at Today’s Prices?

To determine if Disney is a good value, one must look at the Three-Year Plan Iger set in motion.

The Bull Case:

Disney is trading at a forward P/E ratio that is historically low compared to its pre-streaming-wars era but they’re also seeing margin pressure do the various investments and the shrinking high-margin linear revenues. If the company achieves double-digit EPS growth and the Experiences segment’s $60 billion investment begins to yield a high return on invested capital (ROIC), the stock is undervalued. Furthermore, a standalone ESPN DTC service could unlock a massive new revenue stream that the market hasn’t yet fully priced in if it grows well.

The Bear Case:

The terminal value of the linear networks is a black box. If the decline in ABC and the linear ESPN business accelerates faster than the growth in Disney+ and ESPN DTC, the company’s total earnings could stagnate. This is a company that had near 30% operating margins prior to the linear decline and now sits at sub 20%. Additionally, the high Capex requirements for the cruise line and park expansions mean that the dividend growth may remain modest for several years.

The Verdict:

At current levels, Disney appears to be a fair value for the patient investor. The company has moved past the crisis phase of Iger’s return. It now has a profitable streaming business, a solid film slate, and a moat in the theme park industry that no competitor can match.

The primary catalyst for the stock will be the successful launch of the one-app experience and the growth of the ESPN streaming service.  When scaled, these can both be high margin businesses that would offset the shrinking linear business. Their SVOD business is just moving into the phase where economies of scale benefit it a ton and if they can continue growing the topline there in the low to mid teens then operating margins could soon sit at 20%. If Disney can prove that it can grow total earnings while managing the decline of linear TV, the stock could see a significant re-rating toward its historical multiples which when combined with earnings growth could provide a substantial return.

Still, this isn’t without risk and may take some time. During that wait investors do get a stock buyback at decent valuations and a small dividend. For me, Disney is not attractive enough at these prices and there’s no rush to buy given that it may take some time to fully realize the growth potential of this business but if the stock keeps falling and gets back to the $90 range, I might pick up some shares.

Conclusion

Disney’s Q1 FY2026 results show a company that is pivoting well. The fixing stage is nearing the end and now the company has to continue to show that the growth stage has begun. While theatrical costs, carriage disputes and continued investments in parks created some ugliness in the Q1 bottom line, the underlying engine, fueled by IP like Zootopia and Avatar, is doing well.

For investors willing to look past the short-term earnings volatility and the back-half weighted guidance, the company is building a technologically advanced, integrated entertainment ecosystem that is better positioned for the next decade than it has been in years.