Disney’s Undervalued Upside: Why Phill Gross Sees a Hidden Gem in the Mouse House

The Walt Disney Company (DIS) has long been a stalwart of the entertainment industry, but its stock price has lagged behind its financial progress—until now. Among the 10 stock picks highlighted by Phill Gross, co-founder of Adage Capital Management, Disney stands out with a 37.94% upside potential, surpassing his 34% threshold for high-potential equities. This valuation gap raises a critical question: Why is Disney undervalued, and what makes it a compelling investment in an era dominated by AI hype?

The Financial Case for Disney

Disney’s fiscal 2025 Q1 results (ended December 28, 2024) reveal a company in transition. Revenue rose 5% year-over-year to $24.7 billion, while income before taxes jumped 27% to $3.7 billion, and diluted EPS surged 35% to $1.40. Adjusted EPS climbed even higher—44% to $1.76—a stark contrast to its stock price, which lags behind these metrics. The company’s total segment operating income hit $5.1 billion, a 31% increase, underscoring operational resilience.

The turnaround of Disney’s streaming division, Disney+, is central to this story. After years of losses, the service turned profitable, driven by cost cuts and subscriber growth. This shift, alongside the steady cash flows from linear TV networks (despite cord-cutting), has freed capital for reinvestment in high-margin areas like theme parks.

Theme Parks as the New Growth Engine

Disney’s theme parks are its crown jewel, defying competition from Comcast’s Universal. Attractions like Avatar Flight of Passage and Star Wars: Rise of the Resistance have revitalized attendance, while Orlando’s tourism boom indirectly fuels demand. These parks now generate $24.7 billion in annual revenue, with operating income up 31% year-over-year.

The company’s focus on premium experiences—think $500-per-day “VIP” passes in Hong Kong—highlights its ability to monetize demand without relying on volume. This strategy has insulated Disney from broader economic pressures, even as gaming divisions like EA and Zynga struggle.

The Undervalued Stock: A Contrarian Play?

Disney’s stock trades at 21.4x forward P/E, below its five-year average of 24.6x, despite a 31% revenue increase since 2019. Analysts argue this discount ignores Disney’s structural advantages: a global brand, dominant streaming content library, and theme parks with pricing power.

The AI Dilemma: Why Gross Still Bets on Disney

While Gross acknowledges AI stocks like his “cheapest AI pick” (undisclosed) have outperformed Disney since early 2025, he views Disney as a “structural buy” for its diversified revenue streams and undervalued assets. Adage’s $205.23 million stake in Disney, part of a $57.19 billion portfolio, reflects a long-term strategy.

Yet, the contrast is stark: AI stocks like NVIDIA and Broadcom have seen declines, while Disney’s fundamentals grow. Gross’s portfolio balances this tension—prioritizing AI for short-term gains but anchoring in Disney for stability.

Conclusion: A Gem in a Digital World

Disney’s upside potential rests on its ability to leverage content and experiences in a fragmented media landscape. With $5.1 billion in operating income growth, a profitable streaming division, and theme parks that command premium pricing, the company is primed for revaluation.

While AI stocks dominate headlines, Disney’s 37.94% upside and undervalued multiple ($150.80 vs. a $207.00 target price) make it a compelling long-term play. As Gross’s portfolio shows, even in an era of tech disruption, timeless brands with strong cash flows—and a few magical attractions—still hold their value.

Investors would be wise to ask: How long can Disney’s fundamentals remain overlooked? The answer may just be the next chapter in the Mouse House’s enduring story.