Stock investing is always a comparative exercise; no company exists in a vacuum, and shareholders don’t make investment decisions in isolation. So, let’s put two entertainment giants together in the ring, and see who comes out on top.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Walt Disney Company (DIS) is the defender, the established name with a history of success and the portfolio to prove it. From early animation, to theme parks, to the famous ‘Disney Princesses’ branding, the mouse is truly ubiquitous.” data-reactid=”12″>The Walt Disney Company (DIS) is the defender, the established name with a history of success and the portfolio to prove it. From early animation, to theme parks, to the famous ‘Disney Princesses’ branding, the mouse is truly ubiquitous.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The challenger is Netflix (NFLX), the company that has famously disrupted the TV market with its online streaming options. Oddly, Netflix’s penchant for change should not have been so surprising – the company got its start in the 1990s as the online mail-order DVD supplier that killed the video rental store. Online streaming is its second lease on life.” data-reactid=”13″>The challenger is Netflix (NFLX), the company that has famously disrupted the TV market with its online streaming options. Oddly, Netflix’s penchant for change should not have been so surprising – the company got its start in the 1990s as the online mail-order DVD supplier that killed the video rental store. Online streaming is its second lease on life.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="We can put these two stocks together in TipRanks Stock Comparer, to get an overview of their respective positions.” data-reactid=”14″>We can put these two stocks together in TipRanks Stock Comparer, to get an overview of their respective positions.
<h4 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Walt Disney Company (DIS)” data-reactid=”23″>Walt Disney Company (DIS)
While we described Disney as the defender, protecting a venerable name and niche, it is also the challenger. The company is in process of launching Disney+, an online streaming service designed to compete directly with Netflix, while drawing on Disney’s in-house library of established content. Disney is betting that it can have the best of both worlds: Known content to draw in customers and keep production costs under control, with low pricing and familiar brands to make those customers happy.
So, Disney is looking at a potential blockbuster in 4Q19, when Disney+ opens in November. The company will use the streaming service to offer a set of known brands to watchers – Disney, Marvel, Pixar, Star Wars – both justifying its capital expense in acquiring the names and giving the audience a well-curated library to choose from. The initial subscription, said to be just $6.99 per month, will undercut Netflix’s $13 monthly cost.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Wall Street’s analysts agree that the model shows potential. Writing from Merrill Lynch, Jessica Reif Ehrlich set a $168 price target on Disney after the successful box office opening of ‘Toy Story 4.’ She pointed out that the fourth installment of popular movie franchise drew in 7% more in ticket sales than its predecessor, and sees the movie “generating between $1-$1.15bn in ultimate global box office for Disney, which could produce 23c in EPS for Disney over the life of the film.” She adds that the film’s popularity makes it a potential driver for the release of Disney+.” data-reactid=”26″>Wall Street’s analysts agree that the model shows potential. Writing from Merrill Lynch, Jessica Reif Ehrlich set a $168 price target on Disney after the successful box office opening of ‘Toy Story 4.’ She pointed out that the fourth installment of popular movie franchise drew in 7% more in ticket sales than its predecessor, and sees the movie “generating between $1-$1.15bn in ultimate global box office for Disney, which could produce 23c in EPS for Disney over the life of the film.” She adds that the film’s popularity makes it a potential driver for the release of Disney+.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Quality content, brand recognition, and low cost are building a strong foundation for Disney+ and the company’s future generally. Loop Capital analyst Alan Gould sees “Disney’s success to be initially measured by Disney+ subscriptions and believes that its first year count will top the 10M consensus.” Like Hodulik, Gould sets a $165 price target on DIS.” data-reactid=”40″>Quality content, brand recognition, and low cost are building a strong foundation for Disney+ and the company’s future generally. Loop Capital analyst Alan Gould sees “Disney’s success to be initially measured by Disney+ subscriptions and believes that its first year count will top the 10M consensus.” Like Hodulik, Gould sets a $165 price target on DIS.
Overall, Disney gets a moderate buy rating from the analyst consensus, based on 13 buys and 5 holds assigned in the past three months. The stock currently sells for $141, so the $156 average price target suggests an upside of 10%.
<h4 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix, Inc. (NFLX)” data-reactid=”50″>Netflix, Inc. (NFLX)
The online streaming innovator is facing hard times. The stock is down over 8% in the past 12 months, and with a PE ration exceeding 130 it’s expensive no matter how you slice it. And in recent weeks, Netflix has seen two high-profile losses on the content front, having lost the streaming rights to ‘The Office’ starting in 2021 and ‘Friends’ in 2020. This is a bit ominous, as those are the channel’s two most-watched shows, and only 6 of the top 20 streaming programs are Netflix originals.
Netflix is rolling with that blow, however, and the company is upping its content budget. Full-year 2019 expenditures for new shows is expected to hit $15 billion, 25% more than 2018’s $12 billion. That’s an enormous amount of money to burn, and it highlights Netflix’s greatest weakness: the company will spend upwards of $18 billion just on content creation and marketing this year, with expected revenues of approximately $20 billion. The math is simple, and it’s not a sustainable model.
Netflix hopes that increasing subscriptions will boost the bottom line and slow the cash burn, but even there the prognosis is mixed. The company has nearly 150 million subscribers in the US and abroad, split roughly 65 million domestic and 81 million internationally. The bad news, however, is that domestic subscription growth has slowed from 5% annually to 3.6% in 2018. International subscription growth is in double digits, but due to currency exchange and pricing differences, the US market is more profitable.
The biggest problem facing Netflix, however, is not the cash burn. Rather, it is just the business model. Netflix isn’t doing anything that other companies can’t do, too. The impending launch of Disney+, and other streaming services from the likes of Apple, Amazon, and HBO, should make that obvious. Netflix advantage lies in its early adoption of the online streaming model, and hence its current advantage in pricing and audience over cable TV packages. And its mania for spending on new content, as it cannot rely on licensed shows. Netflix needs more homemade hits like ‘Stranger Things.’
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="With that as background, SunTrust’s Matthew Thornton looked ahead at Netflix’s Q2 earnings report, to be released on July 17. He points out the positive expectations: 350,000 new domestic subscribers along 4.8 million from the international audience, plus a revenue forecast of $4.94 billion and 56 cents EPS. It’s enough for him to give a buy rating, a $402 price target, and a 5.8% upside to the stock.” data-reactid=”55″>With that as background, SunTrust’s Matthew Thornton looked ahead at Netflix’s Q2 earnings report, to be released on July 17. He points out the positive expectations: 350,000 new domestic subscribers along 4.8 million from the international audience, plus a revenue forecast of $4.94 billion and 56 cents EPS. It’s enough for him to give a buy rating, a $402 price target, and a 5.8% upside to the stock.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Writing from Raymond James, Justin Patterson points out that season three of ‘Stranger Things’ was a strong performer that compared well with Netflix’s original movie, ‘Bird Box.’ The latter drew in 45 million viewers in its first week. More impressively, Patterson notes that 26% of Netflix’s subscribers have watched the new series, and 12% have already finished it. “That is an impressive feat against competition from vacations, World Cup, movie releases, and other forms of entertainment. This illustrates that originals are resonating with consumers and finding value with binge viewing. As content breadth and quality improve and drive more engagement, we see further pricing upside.” Patterson gives the stock a solid buy rating, expecting it to improve on past performance, but declines to set a specific price target.” data-reactid=”64″>Writing from Raymond James, Justin Patterson points out that season three of ‘Stranger Things’ was a strong performer that compared well with Netflix’s original movie, ‘Bird Box.’ The latter drew in 45 million viewers in its first week. More impressively, Patterson notes that 26% of Netflix’s subscribers have watched the new series, and 12% have already finished it. “That is an impressive feat against competition from vacations, World Cup, movie releases, and other forms of entertainment. This illustrates that originals are resonating with consumers and finding value with binge viewing. As content breadth and quality improve and drive more engagement, we see further pricing upside.” Patterson gives the stock a solid buy rating, expecting it to improve on past performance, but declines to set a specific price target.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Cowen’s John Blackledge did get specific, giving NFLX a $455 target, suggesting a 20% upside potential to the stock. He based his optimism on an upbeat forecast for solid results in the Q2 report. Pointing to survey data indicating that as many as 51% of current Netflix subscribers expect to watch ‘Stranger Things’ new season, he believes “many lapsed users could resubscribe to watch the show, potentially driving up gross subscriber additions late in the second quarter and into the third quarter.” We will know next Wednesday if Blackledge is correct.” data-reactid=”73″>Cowen’s John Blackledge did get specific, giving NFLX a $455 target, suggesting a 20% upside potential to the stock. He based his optimism on an upbeat forecast for solid results in the Q2 report. Pointing to survey data indicating that as many as 51% of current Netflix subscribers expect to watch ‘Stranger Things’ new season, he believes “many lapsed users could resubscribe to watch the show, potentially driving up gross subscriber additions late in the second quarter and into the third quarter.” We will know next Wednesday if Blackledge is correct.
Where DIS was a moderate buy, Netflix is holding onto an analyst consensus of strong buy, based on 24 buys, 5 holds, and 1 sell from the last three months. This rating is supported by the stock’s 41% ytd gains and $379 share price. The average price target, $422, indicates a potential 11% upside.
Wrapping Up
Both Disney and Netflix present compelling cases on their own merits. Both show potential for near-term growth. Disney’s new streaming service can draw on a portfolio of known hits, while Netflix has shown once again – with ‘Stranger Things’ – that it can knock one right out of the park. While Netflix shares have slipped in the last 12 months, Disney’s 13% gain in April raises some question about how much room it has for growth.
The companies have similar upside potentials; 10% for DIS and 11% for NFLX, so it may help to look at some other metrics. In that case, reviewing the analyst consensus, we saw that Disney was a moderate buy, while Netflix was a strong buy, but Disney’s far lower PE ratio of 15, compared to NFLX’s 134, would indicate that the mouse is more affordable. With so much else being equal, we’ll leave it at that.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Visit TipRanks’ Stock Comparison Tool to analyze DIS and NFLX side-by-side.” data-reactid=”86″>Visit TipRanks’ Stock Comparison Tool to analyze DIS and NFLX side-by-side.
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