In the 1960s, there were only three TV channels available in the U.S. Today, consumers have endless entertainment options.
Content may be king. But the streaming wars aren't just about Walt Disney (DIS -0.93%) versus Netflix (NASDAQ: NFLX), Amazon (NASDAQ: AMZN), or HBO Max. Rather, it's a battle for eyeballs on screens. That includes movies, shows, video games, YouTube, TikTok, Twitch, Instagram, Twitter -- you name it.
The industry is becoming saturated. And now more than ever, it's important to invest in a company with a sustainable business model that's built to last. Despite being one of the newest players in digital streaming, Disney stands out as the best company in the space and arguably a better buy now than Netflix stock. Here's why.
Image source: Getty Images.
Netflix is more profitable than ever before
Let's give credit where credit is due. There's no denying that the last few years have been transformational for Netflix. The company recorded its first annual profit above $1 billion in 2018 and hasn't looked back. In 2021, it earned $5.1 billion in net income and just shy of $30 billion in revenue, making for a monster multiyear growth spurt.
NFLX Revenue (Annual) data by YCharts
However, Netflix's business depends on spending a lot of money on new content to keep existing subscribers entertained and convince new ones to pay for the service. Unsurprisingly, the company has struggled to produce consistently positive free cash flow due to this high-spending business model.
The lifecycle of a Netflix movie or show
The issue with Netflix is that it produces a lot of mediocre content that becomes essentially worthless over time. And what hits Netflix does produce have little lasting effect once the final season is released.
Netflix doesn't have the on-demand movie library that Amazon has. And the outside-produced shows or movies offered on Netflix are constantly threatened. A recent example is NBC's decision to remove content like The Office off of Netflix and host it exclusively on the company's new streaming service -- Peacock.
Netflix does have some incredibly successful shows like The Queen's Gambit and Ozark, to name two recent examples. But in general, the company is fighting an uphill battle to produce new content to keep subscribers engaged or risk losing them. In addition to gaining subscribers, a key reason for Netflix's growth has been the ability to raise prices. Netflix has so far been successful in this regard. But that's largely because of its first-mover advantage, strong brand, and high quantity of content production.
Netflix faces a catch-22. If it lowers spending and produces less content, it may lose subscribers and not be able to raise prices. But in order to make the content needed to retain existing subscribers and justify price hikes, it needs to spend a lot of money. In this vein, Netflix's recurring revenue stream isn't the same caliber as a less capital-intensive subscription business like, say, Amazon Web Services (AWS).
Disney's business is struggling
There's no denying that Netflix has been a better business than Disney the last couple of years. Disney lost money in its fiscal 2020 and posted a meager $2 billion profit in fiscal 2021, which pales in comparison to years of $10 billion-plus annual profit pre-pandemic.
DIS Revenue (Annual) data by YCharts
Disney's parks and studio entertainment businesses have been severely impacted by the COVID-19 pandemic, whereas Netflix, in many ways, benefited from social distancing and lockdowns. Disney+, which launched in November 2019, requires a lot of investment to build out, which is weighing on Disney's short-term profit. However, the focus of this article isn't about which business did better last year or the year before. It's about which business is set up to do better in the decades to come.
The lifecycle of a Disney movie or show
The big difference between Disney and Netflix is that Disney generates lasting benefits from its content, while Netflix rarely does. Disney has universes and themes that grow over time. Movies or shows made in the Marvel or Star Wars universes add to the storylines. Characters develop, plots thicken, and the stage is set for future content production within those universes.
Disney can further profit from its content through merchandise or by creating rides or attractions based on its movies and shows. Recent examples include the Star Wars: Galactic Starcruiser immersive experience, which opened on March 1, construction of the Tron Lightcycle Run ride in Magic Kingdom's Tomorrowland, and Guardians of the Galaxy: Cosmic Rewind which opens this summer at EPCOT.
What's more, Disney has a rich suite of its own in-house produced content available on Disney+ that is arguably much more valuable than the older content on Netflix. Disney+ hosts all of the movies, shows, behind-the-scenes footage, and exclusives Disney has made from 1928's Steamboat Willie to Encanto. The sheer value of Disney's older content reduces the pressure to constantly churn out new shows or movies solely for the sake of getting subscribers.
Focus on the big picture
Netflix may be a better pure streaming company than Disney, but Disney is a much better and more efficient media company than Netflix. Throw in Disney's ownership of 21st Century Fox, a 67% stake in Hulu, ESPN+, cable, broadcasting, licensing, and more, and you have an absolute behemoth that produces added value from overlaps within its business segments.
Disney stock may look expensive now given the company's profits are down. But since the parks business is beginning to boom again and Disney+ is still hitting its stride, I would argue that Disney is a much better long-term buy than Netflix right now.
