Better Buy: Disney vs. Netflix

Two of the leading entertainment providers are moving in different directions, but that doesn't mean the stocks will continue to be passing ships.

Rick Munarriz
Rick Munarriz
Jul 21, 2019 at 11:30AM
Consumer Goods

Everyone is circling Nov. 12 on their calendars as the day that Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) go head-to-head. The launch of Disney+ will officially mark the day that the two companies are competitors instead of partners in the premium streaming market. Investors naturally don't have to wait that long to pick a side. Every trading day is a battleground. 

There doesn't have to be just one winner. Netflix and Disney are my first and third largest holdings, respectively. I obviously think that both entertainment leaders have what it takes to beat the market over the long haul, and I'm probably not alone. However, if you had to choose only one investment, which one belongs in your portfolio? Let's size them up to see which one comes out on top.

Alice in Wonderland characters posing in front of the Mad Tea Party ride at Disney World.

Image source: Disney.

Streaming along

Netflix and Disney command mammoth audiences for their content, but the similarities pretty much end there in terms of volatility, growth expectations, and valuations. Let's start with volatility. One only needs to look at last week -- when Netflix surrendered nearly 16% of its value after posting weaker than forecasted net subscriber additions -- to see how easy it is to get that stock moving sharply higher or lower.

Disney tends to cradle itself within tight trading ranges, sometimes for years before breaking out. It traded in a roughly 33% range -- between the low $90s and low $120s -- for three years before breaking nicely higher a few months ago. Netflix, on the other hand, was born to move. The cuts can be deep, but even after last week's tumble the stock has still more than tripled over the past three years.

Netflix also drives on the left-side passing lane when it's on the same road as Disney. As poorly received as its second quarter may seem, revenue still rose 26% for the period -- and it's targeting a 31% year-over-year uptick on the top line for the current quarter. Slow and steady is the norm at the House of Mouse, and even when it has a big hit at the multiplex or a great season at its theme parks or even major acquisition it doesn't seem to step hard on the accelerator. You have to go back 15 years to find the last time Disney posted annual revenue growth in the double digits. 

Valuation is where Disney shines relative to its more nimble match in this contest. Disney trades at 4.2 times its trailing revenue, roughly half of the multiple that Netflix is commanding. The gap is wider on the bottom line given Netflix's depressed earnings as it scales its presence worldwide and makes beefy investments in content. 

Add it all up, and who comes out on top? Four months ago I pitted the two stocks against each other. I went with Disney as the better buy, and it's turned out to be right call so far. Disney stock has soared 27% in that time, compared to Netflix and its 12% decline. I still believe in both investments, but I'm going to use the momentum shift to rally behind Netflix this time as the smarter bet for opportunistic investors. The volatility in Netflix shares makes it a hard stock to hold for risk-averse investors, but it has bounced back from darker stretches in the past. I was right last time. Let's see if I also get it right this time around.