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4 Reasons Netflix Became More "Valuable" Than Disney

By Leo Sun - May 30, 2018 at 8:06PM

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Investors are willing to pay a much higher premium for Netflix.

Netflix's (NFLX 2.96%) market cap recently eclipsed Disney's (DIS 2.33%) for the first time in history, making it the most valuable media company in the world. As of this writing, Netflix's market cap of $152 billion remains higher than Disney's market cap of $148.5 billion.

That comparison sparked claims that Netflix had become "bigger" than Disney. This isn't true, because Disney is expected to generate nearly four times as much revenue as Netflix this year -- and it's much more profitable. Disney's enterprise value of $173.7 billion, which takes debt into consideration, is also much higher than Netflix's enterprise value of $155.9 billion.

Netflix's LA office.

Netflix's Los Angeles office. Image source: Netflix.

While Netflix isn't technically "bigger" than Disney by most measures, we should still examine how the streaming giant's market cap -- which more than doubled over the past 12 months -- overtook Disney's. Here are the top four reasons.

1. Its premium valuation

A company's market cap is a stock's price multiplied by the number of outstanding shares. If we divide a company's stock price by its estimated earnings per share for the years ahead, we get its forward P/E ratio.

Disney trades at P/E ratio of 14 times this year's earnings and 13 times next year's earnings. Netflix trades at 236 times this year's earnings and 122 times next year's earnings. Investors are willing to pay a premium for Netflix's shares because it's expected to generate much higher growth than Disney.

Netflix's revenue and earnings are expected to jump 38% and 129%, respectively, this year. Disney's revenue is expected to rise just 7% as its earnings climb 24%. 

2. Its advantage as a first mover

Netflix repeatedly established a first-mover advantage with rent-by-mail DVDs, streaming video, and original content.
After Netflix introduced streaming videos in 2007, the company soon realized that higher internet speeds and multiplatform apps would be the future of TV viewing.

Yet for years major traditional media companies, including Disney, broadly dismissed that idea. Meanwhile, Netflix's worldwide subscriber base grew from 22.9 million in the third quarter of 2011 to 118.9 million last quarter.

Competitors eventually scrambled to counter Netflix with their own streaming platforms. Disney, for example, recently introduced stand-alone platforms for ESPN and its massive catalog of first-party content. But it's unlikely that these new offerings will match Netflix's global reach anytime soon.

Netflix's home screen.

Image source: Netflix.

3. Leveraging artificial intelligence to produce original content

In 2012, Netflix started producing its own original content to reduce its licensing fees and dependence on third-party content providers. Netflix leveraged analytics powered by artificial intelligence to decide which shows to produce.

For example, Netflix decided to produce House of Cards after analyzing how many of its viewers watched political dramas, films with actor Kevin Spacey, and movies directed by David Fincher. Mixing those three elements produced a hit drama. Netflix then repeatedly leveraged its users' viewing habits to create a new generation of hit shows like Stranger Things.

This is a self-sustaining growth cycle for Netflix -- the more subscribers it accumulates, the better its system gets at "predicting" what type of content wins over viewers.

4. It doesn't own a legacy media business

Investors are willing to pay a premium for Netflix because it isn't shackled to legacy media businesses that are besieged by cord cutters. Instead, Netflix is one of the key catalysts in disrupting traditional television viewing and it disrupted benefits from cable users who are cutting the cord.

Conversely, Investors aren't willing to pay a high premium for Disney because its cable unit -- particularly ESPN -- continues to lose viewers. ESPN's domestic viewers dropped by 2 million to 88 million last year, along with similar declines at ESPN2, ESPNU, ESPNews, and the SEC Network.

The key takeaways

While Netflix can be seen as more valuable than Disney based on its market cap, it's important to know the details behind that number. Investors should understand why Netflix's stock trades at such a high premium in comparison to Disney's and how the factors behind that enthusiasm could widen its valuation lead over the House of Mouse.

Leo Sun owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$233.49 (2.96%) $6.71
The Walt Disney Company Stock Quote
The Walt Disney Company
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