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Better Buy: Walt Disney vs. Amazon

By Parkev Tatevosian - Feb 11, 2021 at 7:18AM

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Pitting the e-commerce retailer against The House of Mouse.

Walt Disney (DIS 1.64%) and Amazon (AMZN 2.57%) are top companies with a long history of providing solid returns to investors. Disney's track record is much longer, but Amazon has the edge in share-price performance over the last two decades. During the coronavirus pandemic, however, they're almost at opposite ends of the spectrum -- Amazon can barely keep up with its surging demand, while Disney has had to close many of its most lucrative operations. And Amazon's advantages don't end in the aftermath of the pandemic. Moreover, nobody knows when there will be an end to restrictions on in-person gatherings -- on which The House of Mouse is extremely reliant.

It's clear that Amazon has the advantage in the short run, but let's see if Disney's long-run prospects are enough to overtake the e-commerce retailer as the better investment.

A man sitting with his hands folded.

Image source: Getty Images.

Walt Disney 

Spearheading Disney's growth over the next several years will be its streaming services. The company expects that by 2024 it will have signed up over 300 million customers among its three services: Disney+, Hulu, and ESPN+. As of Dec. 2, it had 137 million subscribers, and it's growing its base rapidly. For instance, Disney+ went from its debut to 86.8 million in a little over a year.    

Its theme parks that are still allowed to operate at reduced capacity remain highly popular among consumers even though the threat of COVID-19 remains. That demonstrates two things: first, the pent-up demand that is accumulating among consumers to get out of their homes, and second, the trust that people are showing for Disney's ability to provide a safe place for families. It is almost a foregone conclusion that if coronavirus infection is no longer a risk, Disney's parks will return to full capacity.

And despite the millions of people who are canceling cable service in favor of streaming content, Disney's media segment remains strong. In fiscal 2020, which ended Oct. 3, it generated 105% of operating profits for the overall company. The core of the media segment is live sports. With its availability still limited among streaming subscriptions, it is likely to fuel profits in the segment for several more years.

All in all, Disney's long-run potential is excellent. However, it still faces risks from the coronavirus restricting its operations and the extent to which cord-cutting will eat into its most profitable segment of 2020.

A group of boxes on the front porch of a house.

Image source: Getty Images.

Amazon 

The pandemic allowed Amazon to acquire new customers and generate more spending from those already using its platform regularly. The general population quickly accelerated the shift in spending from in-person to online.

According to the Federal Reserve Bank of St Louis, e-commerce sales as a percentage of overall sales jumped to 16.1% from 11.8% at the onset of the pandemic, before retreating slightly to 14.8% as businesses began to reopen. The phenomenon turbocharged Amazon's sales by 38% in 2020. As the risk of contracting the coronavirus lingers, the e-commerce giant's guidance predicts that revenue will grow by roughly 36.5% in the first quarter of 2021.

The flip side of the increasing online migration of shopping is that it forced bricks-and-mortar businesses that were reluctant to start selling on Amazon or not offering a large portion of their products there to start or expand their relationship with the e-commerce giant. Consequently, third-party seller services revenue increased by over 50% in each of its previous three quarters. After putting in the work to put products on the site, small and medium-size businesses are less likely to remove them after the pandemic.

And the highly profitable Amazon Web Services, which offers enterprises and institutions a broad set of on-demand off-site computing services, increased sales by 30% in 2020 despite Amazon continuing to reduce prices for customers. The segment made up over 50% of operating profits in 2020 and will probably continue thriving as Amazon had locked in $50 billion in contracts for its services as of Dec. 31.  

Overall, although the rate of increase may come down in the aftermath of the pandemic, Amazon still has avenues to provide robust revenue growth to investors.

The verdict 

Undoubtedly, Amazon is performing better than Disney during the pandemic. And it has more potential to increase revenue for several years in the aftermath of COVID-19. Still, Amazon has a long way to go to become as profitable as Disney. Excluding last year, when it was operating at severely reduced capacities, Disney's operating profit margin is three times higher than Amazon's.

But Amazon's sustainably higher revenue growth, expanding profit margins, and better position to thrive during a pandemic give it the edge over Disney. Therefore, if you had to pick only one of these great companies to invest in, it should be Amazon. 

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,135.50 (2.57%) $53.50
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$103.26 (1.64%) $1.67

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