Subscription services have risen swiftly in popularity, permeating nearly every industry. Nowadays, people can pay a monthly fee to access popular services such as streaming, gaming, and expedited shipping. However, smaller businesses have also homed in on this lucrative strategy, offering monthly subscriptions for niche services such as high-end meat delivery or even veterinary services.
By utilizing a subscription model, companies can look forward to better customer retention, financial forecasting, and cash flow management. It's not surprising that Amazon (AMZN 3.95%) and Walt Disney (DIS 2.40%) have both used subscriptions to grow their businesses. Each company's stock has declined over the last year thanks to inflation and a decrease in consumer spending.
Despite the losses in share price, Amazon and Disney both make great long-term buys. However, one is ultimately the better buy. Let's assess.
Amazon: An e-commerce titan
Amazon began its journey in retail by selling music and videos, quickly moving on to books and then thousands of other items. Today, the company is easily the first place most consumers turn to when making an online purchase.
Amazon took its business to another level when introducing its subscription service, Amazon Prime, in 2005. The membership has grown to offer expedited shipping for its e-commerce business, ebooks, music, gaming, and the popular streaming service Prime Video. A recent acquisition could also see it provide healthcare services in the near future.
As of April 2021, Amazon Prime had amassed 200 million subscribers worldwide, adding 50 million in a single year. Consequently, 87% of Amazon's revenue in 2021 came from retail sales and Prime subscriptions. Additionally, between 2019 and 2021, subscription revenue rose 146%, from $12.6 billion to $31.1 billion. It's unclear how much online retail revenue was driven by Prime members, but considering the free expedited shipping included in the subscription, they likely would have fueled a large part of the $222 billion the company's largest segment made in 2021.
In addition to Prime, Amazon has made moves to safeguard its business in the event of a reduction in consumer spending with Amazon Web Services (AWS). The segment was responsible for 13% of the company's revenue in 2021, but 100% of its operating income. The cloud service business is booming and could truly be the future of the company, as the segment saw 33% year-over-year growth in Amazon's latest quarter.
As of second-quarter 2022, Amazon has the biggest portion of market share in the cloud market with 34% -- well ahead of Microsoft's Azure, which comes second with 21%.
NASDAQ: AMZN
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Disney: A leader in entertainment
Disney is much newer to the subscription game than Amazon, but it has considerably shifted its business to utilize this growth tactic. The House of Mouse became a stakeholder in Hulu in 2009, taking majority ownership in 2019 when its acquisition of 21st Century Fox granted it an over-60% majority stake. The company has since grown its subscription business to include its flagship streaming service Disney+ and sports streamer ESPN+.
In third-quarter 2022, Disney reached 221 million streaming subscribers through its three platforms, dethroning Netflix with 220.7 million for the first time. The achievement underlined the juggernaut Disney+ has become in its less than three years of service as the platform reached 152.1 million members, 68.8% of the company's total subscribers.
As its streaming business flourishes, Disney's theme parks have also seen guests return in droves. The pandemic closures prevalent throughout 2020 and 2021 wreaked havoc on the company's parks business, but 2022 seems to have resolved the situation. In Q3 2022, parks revenue soared 70% year over year, reaching $7.39 billion.
Moreover, the company is currently in the process of securing Comcast's (CMCSA 1.36%) 33% stake in Hulu, the final portion before Disney takes full ownership of the platform. The company has touched on multiple plans for once the purchase is complete, such as combining its three streaming services into one app and offering a totally new subscription tier currently nicknamed "Disney Prime," which would combine streaming offerings with retail and parks services.
NYSE: DIS
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Which is the better buy?
Amazon and Disney both have promising outlooks, each dominating in multiple industries. As a result, investors would be wise to include both companies' stocks in their portfolios, as each one is likely to grant significant gains over the next five years and beyond.
However, if prospective buyers only have room for one, Disney is currently the better value. Its price-to-earnings (P/E) ratio is 63, which is 79% lower than a year ago. Meanwhile, Amazon's P/E ratio is 110, which is actually 81% higher than in September 2021. Admittedly, both ratios are not modest, but both are strong companies.
Investors can't go wrong with Disney or Amazon in their portfolio, but as it stands, Disney's current share price offers considerably more value today.
