Will This Stock Outperform Netflix?

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NFLX: Netflix logo
NFLX
Netflix

The shares of Netflix (NASDAQ: NFLX) currently trade at over $610 per share, which is 75% above its pre-Covid level. On the other hand, shares of Walt Disney (NYSE: DIS) are trading at $150 per share, which is only 9% above its pre-Covid level. Does that make DIS a better stock pick compared to NFLX? Netflix offers streaming services, while Disney is a highly diversified company with offerings in media networks, studio, theme parks, and streaming services. Though the market cap of both companies is very similar, and Disney having a higher revenue base, Netflix still enjoys a much better valuation (P/S) multiple. This is because it is still in the high growth phase. However, we believe that Disney is in a better position to give superior returns in the near future with rapid growth in subscribers of Disney+ and theme parks opening up post-Covid. Advertising revenue is also on an upswing. One of the most important risks Disney faces currently is the uncertainty about the extent of spread and severity of the Omicron variant. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Netflix vs Walt Disney: Industry Peers, But Walt Disney Is A Better Bet.

Revenue Growth

  • Netflix revenues have demonstrated better growth compared to Disney over recent years, with Netflix revenue rising at an average of 29% over the last three fiscal years. On the other hand, Disney revenues increased at an average of only 6% during this period. Healthy growth of Netflix was driven by rising subscriber count in markets other than the U.S. Disney’s revenue growth was affected as its theme parks division was severely hit by the pandemic in 2020. Over the last twelve months (LTM) Netflix revenues increased 20% while Disney saw a 9% drop in top line.
  • Netflix earns revenues from its streaming services in the U.S and international markets, while for Disney, other than streaming, revenue is also generated from parks, studio, media networks (affiliate fees, advertising, broadcasting, etc.)

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Returns (Profits)

  • Netflix’s operating profit margins have been higher than that of Disney and have been on an upward trend.
  • Over the last twelve months, Netflix’s margins have been at 23% while Disney’s stood only at 5%. This was mainly because Disney’s margins were affected by an almost complete shutdown of its parks business, while Netflix benefited from the pandemic.
  • Netflix saw an impressive rise in profitability as it pays for its single largest expense – content – on a fixed cost basis. This means that 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. (related: Check out our theme on Value Tech Stocks)

Risk

  • With respect to financial leverage, Netflix is in a much better position. Its debt as a percentage of equity stands at 5.7%, which is much lower than 20.7% in the case of Disney. However, Disney’s leverage is higher mainly due to recent acquisitions (Fox)
  • Netflix also has a better liquidity position, with cash a percentage of assets standing at 17.6%, much better than 8% for Disney.

Net of it all

Though Netflix has a much higher revenue growth, margin expansion, and better financial position, we believe that this is mainly because it is in a high growth phase. On the contrary, Disney has lagged mainly because its traditional businesses were severely affected by the pandemic. Netflix stock saw sharp growth in the last one year as the pandemic increased streaming subscribers. However, if we look ahead, Disney stock has a much better growth potential from here. Though it started its streaming offering in late 2019, it boasts of over 118 million subscribers in just two years. To put things in perspective, Netflix achieved a subscriber count of 200 million after a decade of operations; at the current rate Disney is likely to reach that milestone is a much shorter time. Additionally, with economies opening up and theme parks starting to function again, Disney’s traditional business divisions are expected to see recovery in the coming quarters. A major risk that the company faces is that its stock could take a hit if the Omicron variant spreads rapidly across the globe and lockdowns are re-imposed. In the absence of large-scale global lockdowns (like the ones seen in early 2020), Disney’s stock is likely to perform much better than Netflix as its business recovers from the pandemic.

 

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Dec 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
NFLX Return -8% 13% 395%
DIS Return -12% -17% 44%
S&P 500 Return -2% 22% 105%
Trefis MS Portfolio Return -2% 41% 281%

[1] Month-to-date and year-to-date as of 12/7/2021
[2] Cumulative total returns since 2017

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