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Better Buy: Disney vs. Netflix

By Jeremy Bowman - Apr 12, 2021 at 8:08AM

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Who comes out ahead in this battle of entertainment giants?

Disney (DIS 1.08%) and Netflix (NFLX 3.29%) have emerged as the clear leaders in the streaming industry.

Netflix is the pioneer and still the biggest streaming service, with a sprawling global enterprise. Disney, on the other hand, has put together a streaming juggernaut in just a couple of years, launching Disney+ in November 2019 and acquiring the Fox entertainment assets that year, beefing up its content library, and taking majority control of Hulu. Disney, of course, is also much more than streaming, owning popular theme parks and resorts around the world as well as television networks like ABC and ESPN.

Scales with coins on them

Image source: Getty Images.

Investors deciding between the two stocks likely have streaming top of mind, as the emergence of Disney+ and the company's decision to restructure its entertainment division to prioritize the streaming service has became the primary catalyst for Disney stock. 

Over the last year, Disney has been the winner as its stock fell more sharply early on in the pandemic.

DIS Chart

DIS data by YCharts

Which of these entertainment stocks is the better buy today? Let's take a closer look at what each stock has to offer.

A Netflix mural depicting several of the company's characters

Image source: Netflix.

Netflix in transition

Netflix has been one of the best-performing stocks on the market since its IPO 2002, growing at a compound annual rate of 40% since then. However, the company is entering a new phase as a maturing business. Growth is slowing in core markets like North America, where subscribers grew by less than 10% last year even with tailwinds from the pandemic. But the company still has ample white space in international markets, which now account for nearly two-thirds of its subscriber base.

The leading streamer faces a wave of competition like never before, as over-the-top programming is going mainstream with nearly every Hollywood studio and cable operator launching its own streaming network. That's a threat to Netflix, but it should accelerate the shift away from the traditional pay-TV ecosystem, ultimately creating more streaming consumers. Investors should also remember that most of the new services only operate in the U.S., so Netflix's business isn't as challenged as it might seem.

As the company's subscriber growth slows, profits are ramping up. Netflix sees operating margins increasing from 18% to 20% this year and then rising three percentage points each year after that, on track for 29% by 2024. In other words, Netflix is turning into a profit machine just as its subscription model is designed to do, generating high margins at scale as incremental revenue essentially flows straight to the bottom line. In addition to subscriber growth, Netflix will supplement revenue growth with price hikes as it's currently doing in the U.S., a sign of its pricing power and competitive strength, and also a key driver of margin expansion.

At this point, 40% annual growth for Netflix stock seems unrealistic, but the company is still in a powerful position as a leader in a large and growing industry, and it won't be easy to unseat.

The Magic Kingdom at Disney World

Image source: Disney.

Disney on the mend

Disney had as much exposure to the coronavirus pandemic as arguably any other company. Movie theaters shut down, live sports took a break, and its theme parks and resorts business became inoperable. Even today, some of its parks are still closed, and the ones that are open are operating well below capacity.

However, investors have looked past that and sent Disney stock soaring to record highs because of the emergence of Disney+ and its broader streaming business, which also includes Hulu, ESPN+, Star in international markets, and Hotstar in India. Disney had originally projected that Disney+ would reach 60 million to 90 million subscribers by 2024, but after surpassing that range in a little more than a year, the company is now targeting 230 million to 260 million subscribers. It sees 300 million to 350 million subscribers across all of its services by that year.

Most impressively, the growth of Disney+ was accomplished with very little original content -- The Mandalorian was the only high-profile show it launched with. The company has reoriented the business to add a steady stream of originals from Marvel, Star Wars, and Pixar, as well as new Disney-branded content. And it's confident enough in its streaming business that it plans to release two summer blockbusters, The Black Widow and Cruella, simultaneously in theaters and on Disney+ with a premium charge.

The streaming business should be a significant driver of Disney's growth for the foreseeable future, but investors can also look forward to the economic reopening and pent-up demand that will drive a surge in its parks and resorts business, where profits are likely to reach record levels once it's safe to travel again.

Which is the better buy?

While Netflix still looks poised to outperform the market given its steadily expanding profit margins and growth opportunities in international markets, Disney seems to have more catalysts to lift the stock in the coming years. The economic reopening and the emergence of its streaming business are two powerful forces, and its trove of intellectual property is unmatched in the entertainment industry, driving long-term growth in its streaming business and maintaining customer loyalty. Disney is the better buy today.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$97.18 (1.08%) $1.04
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$185.88 (3.29%) $5.93
Fox Corporation Stock Quote
Fox Corporation
FOX
$30.63 (0.13%) $0.04

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