Let's go back in time to mid-November 2021. Netflix's (NFLX 4.17%) stock price reached an all-time high around $700 per share and fetched a market cap around $300 billion, which was more than Walt Disney (DIS 1.54%) at the time. Today, Netflix's market cap comes in at about 42.4% of the value of Disney's.
NFLX Market Cap data by YCharts.
Both are considered leaders in the streaming media sector (Disney is more diverse and Netflix is a pure-play streaming company) and both have done well in the past, with plenty of metrics to suggest they are excellent investment opportunities. But both companies have clearly had a rough six months or so of stock performance for very valid reasons.
Let's take a closer look at these two companies and see if we can determine which is the better buy for you.
Netflix and Disney are completely different businesses
Despite the stock drop, Netflix remains a powerful media company. As of March 31, it had 221.64 million global paid streaming memberships. For comparison, Disney reported 196.4 million total streaming memberships across its portfolio of subscription streaming services (including 129.8 million from Disney+) as of Jan. 1.
Image source: The Walt Disney Company.
According to February 2022 data from Nielsen, Streaming accounted for 28.6% of all U.S. TV time and Netflix was 6.4 of those percentage points (1.7 percentage points for Disney+, 3 for Disney's Hulu, 2.3 for Amazon Prime Video, and 5.7 for Alphabet's YouTube). In its shareholder letter, Netflix management noted that it has competed with these companies for 15 years. It also said there are several new streaming services in the last three years that are now challenging Netflix for viewing time.
Netflix is about as pure-play of a streaming service stock as you can get. This is risky given heightened competition from Disney (Disney+, Hulu, ESPN), Amazon, Apple, Comcast's Peacock, and Warner Bros. Discovery's HBO. Disney produces streaming content, but it also has theme parks, multiple television networks, one of the most successful movie businesses in the world, and a massive merchandise and licensing business.
Netflix has a straightforward business model. It needs to constantly produce content that people want to watch to justify the subscription price (and periodic subscription increases) as well as entice new viewers and keep current viewers. The added competition has required that Netflix's business model get complicated.
Content is king
A problem with Netflix's business is that it derives relatively little lasting value from the content it produces. Disney can produce content in one segment of its business (the latest Marvel movie, for example) and incorporate that content into other parts of its business relatively seamlessly. Disney can leverage that content through merchandise or turn it into attractions at its theme parks or produce a spin-off TV series. Disney is a much more multi-layered media company than Netflix, giving it a clear advantage.
Another issue is content management. A lot of money is being poured into excellent content for multiple services these days. Netflix spent $17 billion on content in 2021 alone. But Netflix has received some criticism in the past for having a scattershot approach to content (basically spending a lot of money on shows and movies and hoping some of them are winners).
Disney, by comparison, seems to have a higher success rate on its content because its audience is more streamlined. Disney owns multiple in-demand entertainment brands and it knows what its subscribers want. That helps it deliver a lot more "winners" -- on average -- than Netflix.
A better streaming business
Netflix does have one advantage over Disney at the moment -- profitability in the streaming space. Netflix earned $29.7 billion in 2021 revenue and spent $23.5 billion, pocketing $6.2 billion in operating income. That gives it an impressive operating margin of 21%. Netflix is guiding for $15.92 billion in first-half 2022 revenue and $3.7 in operating income, which shows its top-line growth is slowing, but it's still generating a lot of operating profit.
Meanwhile, Disney generated about $16.3 billion in revenue for its direct-to-consumer (DTC) segment in fiscal 2021 but posted an operating loss of $1.68 billion. For Q1 fiscal 2022 (ended Jan. 1), it earned $4.69 billion in DTC revenue, but had an operating loss of $593 million.
Disney is forecasting just $8 billion to $9 billion in fiscal 2024 DTC spending. Once it brings costs down, it's hoping that Disney+ will become profitable. But at least for now, Netflix is a more profitable streaming business than Disney+, even though Disney+ is growing a lot faster than Netflix.
Valuation comparison
Despite Disney being arguably a better all-around business than Netflix, there's no denying that the stock price drop has made Netflix's valuation a lot more attractive. Growth may be slowing, but its still growing. The analyst consensus estimates guide for 2022 earnings per share (EPS) of $10.94 and 2022 sales of $32.58 billion and 2023 EPS of $12.38 and 2023 sales of $35.71 billion. If those numbers bear out, that would give Netflix revenue growth of 20% in two years and EPS growth of 10% in two years. Given Netflix past performance, those numbers are disappointing. But given that Netflix is now an $88 billion company, not a $300 billion company, those results look pretty good. In fact, Netflix's price-to-earnings ratio is now just 18, and its price to sales ratio is 3 -- which are both nine-year lows.
Disney's spending is more sustainable given the depth and breadth of its media empire. Disney's path forward seems to get easier as it licks its wounds from the COVID-19-induced slowdown in its movie and park businesses, whereas the path forward for Netflix looks to be a grueling slog where it finds itself battling for subscribers with a growing list of competitors.
Disney+ is merely another lever for Disney to pull, whereas Netflix only has streaming. That goes some way to justify why Disney is the better all-around buy now. But given Netflix's attractive valuation, it too has some compelling reasons to consider buying.
