Disney Or Netflix?

by Trefis Team
-16.11%
Downside
149
Market
125
Trefis
DIS
Disney
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Netflix stock (NASDAQ: NFLX) price has increased by an impressive 260% in a little over the last three years, when the stock increased from $124 at the end of 2016 to $448 as on 17th June 2020. That’s great for Netflix. But wait a minute, Disney stock (NYSE: DIS) price has seen an increase of only 18% during the same period. This is despite the fact that Disney’s net income margins have been higher than Netflix’s. Does the stock price movement then make sense? We believe it does and our dashboard Disney vs. Netflix: Does The Stock Price Movement Make Sense? has the underlying numbers.

Sure, Disney’s net income margins have remained higher over the past few years, but the one key element is the revenue growth. Though Disney’s revenue base is more than 3x that of Netflix, its revenue growth is much lower at about 26% between 2017 and 2019, most of it coming in 2019 due to the acquisition of Fox. In contrast, Netflix’s revenue has increased by an impressive 72% during the 2017-2019 period, driven by rising subscriber count and international expansion. Disney’s margins dropped in 2019 due to higher interest cost and acquisition-related expenses, while Netflix’s margins have continuously increased from 4.8% in 2017 to 9.9% in 2019, with this trend expected to continue.

Netflix is a high growth streaming giant. Despite profits being low, its stock price has continuously registered healthy growth mainly due to the rise in top line and market share. This has kept its P/E much higher than Disney, which is a larger and established company with diverse operations. Netflix’s current P/E is at 105x as against Disney’s 19x based on its current market price and FY2019 EPS. So, what along with revenue is driving the difference in price rise? It’s the revenue mix.

How Do The Businesses Of Netflix And Disney Compare?

Let’s have a closer look at the core business prospects. The two companies have become competitors since the time Disney has entered the streaming war. While Netflix’s revenue is almost entirely contributed by streaming services (US and international), Disney is a much more diversified company, with operations ranging from cable networks, parks & resorts, merchandise & consumer products, studio, etc. Disney+ (Disney’s streaming platform) was launched in November 2019 and streaming is expected to contribute 15%-20% of Disney’s revenues in 2020.

Over the years Disney has increased the share of parks & resorts in its total revenue from 31% in 2014 to 38% in 2019. The current lockdown in almost all major cities due to the coronavirus pandemic has led to a virtual shut down of almost all its parks & resorts, thus severely hitting its top line. Additionally, with new film production having halted and advertisers unwilling to spend much, the company’s studio revenue is also likely to be affected in 2020.

The lock down and home confinement of people has increased demand for streaming services. This is where Disney+ is proving to be a saving grace for Disney during this difficult time. But Netflix seems to win this race as it is entirely focused on streaming with no other business division being hit by the pandemic. Additionally, Netflix is also trying to close its net income margin gap with Disney, as can be seen with its margins having consistently gone up in recent years. Netflix pays for its single largest expense – content – on a fixed cost basis, i.e. for every piece of content that Netflix either licenses or self-produces, it pays a fixed dollar amount regardless of how many people watch it or how many subscribers the company has. As a result, each additional subscriber comes with very little extra cost and is therefore profitable.

We believe that as the lock downs are eased and once there are signs of abatement of the crisis, Netflix’s stock is likely to see a marginal downside, as people venturing out for work would mean lower streaming demand compared to the lock down months. At the same time, Disney’s stock could see a marginal uptick as all its non-Disney+ revenue (expected to be about 80% in 2020) is likely to start picking up as parks & resorts open and studio business gets back to normal. Trefis has a price estimate of $421 for Netflix’s stock, which is lower than its current market price; whereas Disney’s fair price value comes to $125 per share, higher than its current market price. For further insight, also check out what makes Netflix better than WWE.

While Disney is likely to outperform Netflix immediately post-Covid, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

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