Better Buy: Disney vs. Netflix

Netflix (NFLX -0.44%) has been one of the giant growth stocks of the 21st century. It's up almost 27,000% since its IPO in 2002. That's not a Monster Beverage (a stock that is up 65,000% in that time frame), but it's still an incredible run. Netflix has changed the way we watch television. More of us stream it now, with more control over what we watch and when we watch it.

Netflix has always been a distributor of other people's content, including many movies and shows made by Walt Disney (DIS -0.20%), the undisputed king of media content. Six years ago, Netflix made a fateful decision to start producing its own films and TV shows, which made it a direct competitor of Disney. It started in 2013 with one show: House of Cards. Since then, we have seen a deluge of original programming from Netflix, including shows like Stranger Things and movies like Bird Box and Murder Mystery.

Image source: Getty Images.

Netflix is now spending billions of dollars to create new material for subscribers along with a selection of content from others. Notably, the company is not making much of its original content available for sale on DVD. Do you want to see Bird Box? You have to subscribe to Netflix streaming. (Amazon is doing something similar with Amazon Prime. Do you want to see The Man in the High Castle? You have to subscribe to Amazon Prime.)

This month, the House of Mouse struck back. Disney introduced its own streaming network, Disney+, at a competitive subscription price of roughly $7 a month. Simultaneously, Disney is ending streaming rights for many of its films and shows on the Netflix platform. Do you want to see films from the Star Wars franchise? You have to subscribe to Disney+.

Disney is a mighty mouse

Disney has been around as a company for 96 years. It's the largest film studio in the world (by revenue), and the most profitable. So far in 2019, Disney has produced and distributed the No. 1 movie based on box office receipts, the No. 2 movie, the No. 4 movie, the No. 5 movie, and the No. 6 movie. And it co-produced the No. 3 movie. And the year's not over yet. Upcoming potential blockbusters from the House of Mouse include Frozen 2 and Star Wars: The Rise of Skywalker and each is quite likely to be a top 10 grossing film.

Source: Box Office Mojo. Note that global box office receipts are as of Nov. 10, 2019.

Consider the nature of all these popular movies. With the exception of Captain Marvel, all these films are sequels or remakes of previous movie franchises. And Captain Marvel is an adaptation of one of Disney's many Marvel comic book properties. Disney has spent billions acquiring the rights to iconic characters. In 2006, Disney spent $7.4 billion buying Pixar and all its film properties. In 2009, Disney spent $4.2 billion acquiring Marvel Entertainment and (almost) all its superheroes. In 2012, the company spent another $4 billion buying the Star Wars universe.

Now Disney routinely churns out billion-dollar epics. We don't have to wonder if The Rise of Skywalker will crack the top 10. It's clear that it will because this movie franchise has a built-in audience. In 2015, The Force Awakens brought in $2 billion in box office receipts. Two years later, the second movie in the trilogy, The Last Jedi, made $1.3 billion at the box office.

Frozen 2 is another billion-dollar property. The original 2013 movie scored $1.27 billion in ticket sales. It's possible the sequel will surpass that. In 2019, Disney can expect to bring in more than $10 billion in box office receipts from its top eight films alone.

The danger for Netflix

Ten years ago, the top 10 blockbuster movies would all end up streaming on Netflix. Now one wonders if any of them will. Disney is moving its content to Disney+. Comcast (the owner of Universal) will be keeping many of its movies and shows for its new streaming service, Peacock. AT&T (the owner of Warner Bros.) will be doing the same thing for its streaming service, WarnerMedia.

The risks for Netflix are obvious. The company spent $12 billion on original content in 2018. It's forecasting that it will spend $15 billion in 2019 and plans on spending more than $17 billion in 2020. That's $44 billion the company is spending on its own content. And yet its value offering for subscribers might actually get worse since that $44 billion in films and TV shows has to replace all the popular content that is disappearing from Netflix.

If the streaming wars result in each film studio streaming its own productions, Netflix is at a severe disadvantage. The company has only been a movie studio for six years. Its library is comparatively tiny. And Netflix owns zero notable film franchises. There's a reason film studios like remakes and sequels: Such movies have built-in audiences and thus reduced financial risk.

Understand that in the movie business, film producers are the risk takers and film distributors are the money makers. This is why Netflix has a market cap of $126 billion. It's always been a distributor of movies and television shows. That's the easy money. But now Netflix is spending billions of dollars creating new content. That's the hard money. You can run up major debts producing movies. You can even go broke doing that -- United Artists was destroyed by a film called Heaven's Gate, and 20th Century Fox was almost bankrupted by Cleopatra.

And the winner is...

Disney is the better buy in this case. The House of Mouse is entering a period of easy money as it starts up a new streaming service for its immense library. Indeed, Disney just acquired Fox's studio, along with its 84 years of film production. Now Disney owns Avatar, The Simpsons, Planet of the Apes, Alien, Diary of a Wimpy Kid, and many other highly lucrative franchises. The future is wide open for Disney, and its stock is cheap at 20 times last year's earnings.

The opposite is the case for Netflix. It is entering a period of dangerous risks, where it is spending $44 billion in three years on unknown art projects. And the popularity of its offerings might very well shrink and shrink substantially. Netflix has a dark and scary future, which is not a good place to be with its stock priced at 93 times earnings.