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The streaming industry has grown exponentially over the last decade as many new players entered the field - including legacy media companies like Walt Disney (DIS), which pivoted to streaming in anticipation of its high growth potential. Disney is a diversified entertainment group, and apart from streaming, its portfolio also includes theme parks, linear TV, and movie production assets. DIS launched its Disney+ streaming service as recently as 2019, which was just a few months before the onset of the COVID-19 pandemic.
Disney: A Relatively New Entrant in the Streaming Industry
During that time, streaming subscribers grew rapidly, as most outdoor entertainment avenues were closed. In its first 16 months of launch, Disney+ surpassed 100 million users, while streaming pioneer Netflix (NFLX) took a decade to reach that same milestone.
In its Q2 shareholder letter, Netflix quoted Nielsen data which showed that streaming accounted for 37.7% of U.S. TV screen time in June 2023 – starkly higher than 26% in May 2021. The data showed that Netflix accounted for 8.2% of the total TV screen time, as compared to 2% for Disney+.
When it comes to profitability, Netflix stands out from the crowd. In October 2022, Netflix said that according to its estimates, the streaming industry’s operating losses for the year would total $10 billion – while it would generate operating income between $5 billion-$6 billion. It eventually ended up posting an operating income of $5.6 billion for the year. Disney’s streaming business, meanwhile, has been losing money, and in the first nine months of fiscal year 2023, it posted an operating loss of over $2.2 billion.
How Disney’s Streaming Business Compares with Netflix
Here's a look at how the key streaming metrics for Netflix and Disney stack up against one another.
- Subscriber base: Netflix added 5.9 million streaming subscribers in the June quarter, which took its total subscriber base to 238.39 million. Disney+ subscriber count, on the other hand, fell to 146.1 million in the quarter. Of those, 46 million are U.S. subscribers, while 59.7 million are international subscribers – excluding Disney+ Hotstar, whose subscriber base fell 24% to 40.4 million in the quarter.
- Average monthly revenues: In the June quarter, Netflix reported an average revenue per user (ARPU) of $16 in the United States, Canada, and New Zealand markets, which was similar to the corresponding quarter last year. Conversely, Disney reported an ARPU of just $7.31 in U.S. and Canadian markets during the period. Disney’s ARPU in international markets was also much lower than Netflix's.
- Netflix also leads in terms of engagement. The Nielsen report cited in its shareholder letter showed that it had the top original streaming series in the U.S. for all but one week in the first half of the year.
Meanwhile, there are several similarities between the business strategies of both Netflix and Disney. First, both companies are now focused on profitability rather than chasing subscriber growth. While Netflix has stopped providing a quarterly subscriber forecast, Disney withdrew its ambitious fiscal year 2024 streaming guidance.
Similarly, both companies started offering ad-supported tiers in 2022. Also, like Netflix, Disney is planning to crack down on password sharing, which is a considerable threat for streaming companies. Netflix has estimated that 100 million people watch its content on shared passwords, representing over 42% of its current subscriber base.
When it comes to price action, both Disney and Netflix trade well below their all-time highs. Disney's underperformance is continuing in 2023, as well, as the stock is barely in the green, despite decisive gains for the broader equities market.
Disney or Netflix: Which is a Better Streaming Stock to Buy?
All things considered, I find Disney a better streaming stock to buy at these price levels, as I believe markets are still not appreciating the turnaround under CEO Bob Iger - where, among other initiatives, the company is targeting structural cost savings of $5.5 billion.
Here are the other top reasons why Disney looks like a better buy right now:
- Disney is razor-focused on streaming profitability, and its streaming losses are down by almost a third to $512 million in the last three quarters. While it has lost subscribers over the period, most of these were for the lower-priced Disney+ Hotstar. The company has also raised subscription prices, which should help to improve earnings for its streaming business in the coming quarters.
- The company might also add value through the ongoing business transformation, as Iger is not averse to shedding Disney's linear TV assets. A complete buyout of Hulu is also in the cards, and Disney is looking to pivot ESPN to a direct-to-consumer model. Plus, the sports media channel has also entered sports betting by launching ESPN Bet in partnership with Penn Entertainment.
- Disney’s valuation multiples look reasonable, as the stock trades at a next-12 months (NTM) price-to-earnings multiple of around 19x, compared to the corresponding multiple of 31x for Netflix. And when it comes to earnings, analysts expect Disney’s bottom line to improve almost 42% in the next fiscal year, while projecting a 32% rise in Netflix’s earnings for the next fiscal year.
Wall Street analysts are also relatively bullish on DIS. The stock has received a Strong Buy rating from 65% of analysts in coverage, while the corresponding figure for Netflix is 58%. Also, Netflix’s mean target price of $432.84 is a premium of only about 2% to current levels, while Disney’s mean target price of $114.06 implies expected upside of over 31%.
While Netflix’s streaming business is currently performing much better than Disney’s, I believe the latter offers much better incremental improvement – including a possible breakeven result in the next fiscal year. This outlook, coupled with the ongoing business transformation and reasonable valuation multiples, makes Disney's risk-reward profile much more appealing than Netflix at current levels.
On the date of publication, Mohit Oberoi had a position in: DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
