Amazon (AMZN 1.21%) and Disney (DIS 2.46%) couldn't be more different in how the COVID-19 pandemic impacted their businesses. The e-commerce giant, on one side, has been experiencing surging sales and forecasting record-setting figures for its holiday season. Disney, on the other hand, has shut many of its operations temporarily, resulting in slumping sales and thousands of employees being fired.
Still, deciding which company is a better buy involves more than understanding what's going on right now. Let's take a deeper dive into these two great companies, and try and figure which one would make a better investment in the long run.
Amazon defies the law of large numbers and continues to grow
Since sales at Amazon have been surging during the pandemic, it makes sense to expect that some portion of those shoppers will stick around long term. While gaining new customers is a great way to increase sales, existing customers are realizing that the company can fulfill more of their needs. Specifically, grocery is one area where Amazon has increased capacity during the pandemic. It's clear that a lot of these existing customers who are now used to seeing additional items on the e-commerce website and faster shipping times, will replace quite a few of their grocery-store trips with online purchases.
In addition, Amazon Web Services, or AWS, the company's cloud-based computing platform, has been thriving. It's another segment that will likely benefit long term from increased customer usage. For businesses, access to increased computing power, but without the underlying hassle of maintaining the hardware and associated software, has become the need of the hour. Fast food restaurant chain Jack in the Box enhancing digital ordering, dining, and customer service experiences for guests, job search site Indeed migrating its data to AWS rather than maintain its own data centers, biotechnology company Moderna accelerating development of messenger RNA medicines, and payments technology giant Global Payments' issuer processing and handling of nearly 27 billion transactions, are just a few examples of companies migrating their computing needs to AWS. The segment not only boasts of a superb growth rate of nearly 30%, but also contributes to the highest operating margin to the overall business, at 30.4%. This should definitely be great news for shareholders.
Its Prime membership continues to be a good value for customers as it comes with Prime Video, free two-day shipping, and other benefits at $5.99 to $12.99 per month for U.S. customers. In contrast, a subscription to Netflix ranges from $8.99 per month to $17.99 per month in the U.S. The Prime membership program feeds into a virtuous cycle where more members attract more sellers that, in turn, attracts even more members.
Finally, the company is selling at a price-to-free cash flow of 62, which is relatively inexpensive compared to its own historical range. The same is true with the price-to-earnings ratio of 89. Considering the fact that the company is growing its top line rapidly with no clear indication of slowing down, the valuation seems quite reasonable.
Disney is taking a one-two punch with cord-cutting and park closures
The Walt Disney Company is struggling lately as the coronavirus pandemic is causing major disruptions to its business. Disney parks had to shut down completely for months and are only partially coming back online. In addition, cruise ships are sitting still, and the entertainment giant hasn't released a major film in U.S movie theaters.
Still, when the pandemic will have run its course, whenever that may be, it is likely there will be pent-up demand for all of the above. Those businesses, while not growing very quickly, were generating profits and cash flow for the company. Between 2012 and 2018, Disney sustained a healthy operating margin above 20%. That's in stark contrast to Amazon, growing rapidly, but at operating margins consistently below 6%.
The media segment has been ailing from cord-cutting for years, and now the pandemic has accelerated that trend. However, Disney has responded well, and has focused its primary efforts on streaming. It already reached over 100 million subscribers across its three streaming services (Disney+, Hulu, ESPN+) in a short amount of time, and viewership is growing quickly. However, this segment is still not profitable; it remains to be seen when, and if, it ever becomes so.
Overall, the company will make a quality investment in the long run, but there will be short-term turbulence along the way.
Amazon and Disney are both excellent companies that will likely add value to shareholders for years to come. However, if you had to pick only one, it should be Amazon. Its surging sales in the near term, as well as excellent long-term prospects combined with a fair valuation, make it a growth stock worth owning.