After revealing a subscriber loss of 970,000 in its recently completed Q2, Netflix (NFLX -0.62%) has now shed 1.2 million over the previous two quarters. Still, the loss was smaller than expected and got investors enthused about the streaming giant, sending its shares 6% higher on the day following the update.
The rosier outlook from Netflix has some investors curious about what it could mean for Walt Disney (DIS -0.83%), which has a robust streaming segment of its own. Do Netflix's more modest losses make Disney stock a buy?
Netflix's subscriber losses were a 1 million improvement from expectations
Overall, Netflix boasts 221 million subs even after losing 1.2 million over the previous two quarters. That puts it in the lead for streaming services, with Disney coming in second place with 205 million. Interestingly, Netflix had forecast losing 2 million subscribers for Q2, so the 970,000 figure was a pleasant surprise. Furthermore, Netflix says it will add 1 million subs in Q3, putting to bed fears it would continue shedding subs for several quarters more.
The news bodes well for Disney, which will report its most recent quarter's subscriber results a few weeks after Netflix. Disney's management had noted that subscriber growth would be more substantial in the year's second half than the first as it rolled out new content and expanded to more countries. Still, Disney's streaming services make up a smaller part of the overall business.
Unlike Netflix, which derives all its revenue from streaming subscribers, Disney's streaming segment accounted for $4.9 billion of the company's $20.3 billion in overall revenue in the quarter ended in April. Moreover, streaming generated an operating loss of $887 million while the company made $3.7 billion in operating income. Admittedly, the entertainment giant's streaming segment is a significant part of the company's plans for the future. Management has noted its flagship service, Disney+, could have between 230 million and 260 million subscribers by 2024.
However, for now, Disney's theme parks and legacy cable channel business are considerably more critical to its success. They generated $1.76 billion and $2.8 billion in operating income, respectively, in the quarter ending on April 1. So while Netflix's better-than-expected subscriber results are a good sign for the prospects of Disney's streaming segment, it is not significant enough to make it a reason to buy Disney stock.
Disney's rising profits and favorable valuation make it a compelling stock
That said, Disney is trading at a forward price-to-earnings ratio of 26, near the lowest in the last year. The stock is 48% off its highs as it has fallen prey to the broader bear market sell-off. The price action is in stark contrast with its business, which has improved since the economic reopening gained momentum. For instance, revenue in the segment that includes theme parks more than doubled year over year in its most recent quarter.
DIS PE Ratio (Forward) data by YCharts.
The favorable valuation amid improving prospects is why to buy Disney stock -- not so much Netflix's lower-than-expected subscriber losses.
