Entertainment has been a growing portion of the economic pie for decades. With multitudes of different options out there and the Cambrian explosion that came with the internet, billions of people have a limitless supply of content to explore at their fingertips. Two companies that have separated themselves from the pack over the last few decades are Disney (DIS 0.18%) and Nintendo (NTDOY -0.33%). Both have built fantastic relationships with their customers through renowned brands and franchises like Mario, Zelda, Pixar, and Marvel.
But which entertainment stock is better to have in your portfolio? Here are four ways to compare Disney and Nintendo that can illuminate for investors which stock is a better buy today.
1. Industry tailwinds
While both Nintendo and Disney overlap by offering family entertainment options, they do so in entirely different manners at the moment. For Nintendo, it sells interactive video game hardware and family-style video games like Mario Kart. Disney focuses on movies and television as the main way it interacts with its customers.
Disney, after making a successful transition a few years back, is now one of the leading video streaming companies around the world along with competitors like Netflix. Streaming industry revenues are projected to grow by 11% a year through 2027 and reach $139 billion in annual spending. As one of the leaders in the space, Disney should benefit from this tailwind as the majority of the video entertainment market switches to internet streaming.
The streaming video tailwind should help Disney grow, but the video game market presents a larger long-term opportunity. Worldwide, spending on video games is estimated to be just under $200 billion a year and is expected to get close to $300 billion by 2025. Clearly, more people (especially young ones) want to spend their money on interactive entertainment instead of passive experiences like TV and movies.
2. Expanding outside of core businesses
As many of you know, games and TV shows are not the only way these two entertainment giants interact with customers. If we look historically, Disney has been much more successful in expanding outside of its core business. Just look at how popular its theme parks are among kids and their families. The company's theme parks and consumer products segment did $28.7 billion in revenue last year and had $7.9 billion in operating income.
Nintendo has historically stayed more within its core gaming business but has recently made some investments to become more Disney-like with its entertainment options. For example, it is opening up four theme parks with Universal around the world, is building mobile applications through a Niantic partnership, and has a Mario movie coming out in 2023. These endeavors are nowhere near the size of Disney's, but definitely have the potential to grow Nintendo's brands this decade.
From an investor perspective, Disney clearly wins with its diversified strategy. But Nintendo is trying hard to catch up.
3. Balance sheet
Looking financially, Nintendo and Disney couldn't be any different. Disney has over $48 billion in debt and $11.6 billion in cash on its balance sheet, while Nintendo has zero debt and a cash position of $11.4 billion. Disney shouldn't have any problem paying down this debt, but it leaves the company in a more precarious financial position if any of its segments put up poor results. Nintendo, on the other hand, can weather many years of poor performance with how conservative its balance sheet looks.
4. Valuation
As of this writing, Disney has a market cap of $164 billion and Nintendo has a market cap of $47 billion. If we add back the debt and subtract the cash from both of their balance sheets, the enterprise value (EV) of Disney goes up to $200 billion and Nintendo's goes down to $35.6 billion.
For its last full fiscal year, Nintendo generated a net income of $3.37 billion. Disney only did slightly better with a net income of $3.55 billion, giving Nintendo stock a wildly cheaper EV-to-earnings ratio of 10.5 versus Disney at 56. This is a huge difference and should not be taken lightly by investors when considering what stock to buy right now.
Even though Disney has a more diversified business, I think Nintendo can be a much better investment going forward due to its valuation, healthy balance sheet, and the massive long-term potential of the video game market.
