Walt Disney (DIS 0.18%) and Six Flags (SIX -0.50%) are two big-name companies that operate in the theme parks industry. But while Disney has a market capitalization of roughly $153 billion, Six Flags is still in small-cap territory with a valuation of just under $2 billion.
Should investors bet on the larger company that also has substantial exposure to the theatrical release, media networks, and streaming businesses? Or will they be able to bank stronger returns by putting their money behind the much smaller, pure-play parks operator? Read on to see why two Motley Fool contributors disagree on whether Disney or Six Flags stock is the better buy.
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The case for Walt Disney
Parkev Tatevosian: The House of Mouse is one of the most iconic enterprises in the world. Of course, the company was devastated by the pandemic because so many of its businesses rely on bringing large groups of people together. Unsurprisingly, revenue declined by 6.1% to $65 billion in its fiscal year 2020. The business is well on its way to recovering from those devastations, and sales jumped by 23% to $83 billion in fiscal 2022.
Meanwhile, consumers are unleashing pent-up demand for away-from-home experiences like visiting a theme park. This bodes well for Disney's prospects over the next several years. If you haven't taken a family trip to a Disney park lately, I will remind you how expensive it can be. The flip side is that it's incredibly lucrative for the business. Despite the hefty price tag, you can scarcely visit a Disney theme park that is not bursting with crowds.
DIS PE Ratio (Forward) data by YCharts
Moreover, Disney has successfully scaled its streaming content business in a few short years. The company has surpassed 200 million subscriptions, and management forecasts the segment will turn a profit in its next fiscal year. Fortunately for investors, while Disney's prospects are rising, its valuation has declined considerably. Disney is trading at a forward price-to-earnings ratio of 20, down from over 40 earlier in 2022. That's created an opportune time for investors to think about buying Disney stock.
The case for Six Flags
Keith Noonan: The bull case for Six Flags hinges on a combined "premiumization" and cost-management strategy introduced by CEO Selim Bassoul, who stepped into the role late in 2021. Bassoul is aiming to boost performance by increasing ticket prices, improving the park experience in order to justify the price hikes, and pursuing new opportunities with franchise partners to increase in-park spending and bolster the experience for guests.
Six Flags is undeniably a smaller player in the parks and resorts category compared to Disney, but it actually has significant room for growth as it aims to increase its ticket prices to be more in line with its larger rival. The company's premiumization initiative seeks to offer park guests a better experience by cutting down on wait times for rides, providing additional amenities around the park, and improving the quality and variety of food and beverages sold throughout its parks.
Crucially, the parks operator is pursuing this strategy with operating expenses firmly in mind, and it's opting for smaller changes that can provide value for guests rather than undertaking big new ride-building projects.
While the company's business isn't as big as Disney's, it also has fewer headwinds in some respects. Disney has scored some big wins with its push into the streaming space, but there's actually significant risk that the streaming push won't be generating much in the way of profits for a while. Disney also has to execute its streaming strategy while navigating the decline of cable and coinciding challenges for its otherwise highly lucrative ESPN network.
Disney is a giant in the overall entertainment space, and I think there's a good chance its stock will deliver wins for long-term investors. But Six Flags has a simpler path to success over the next few years. With the smaller company valued at just 1.4 times this year's expected sales and 16 times expected earnings, Six Flags' premiumization play is worth betting on.
Which stock is the better buy?
Despite both operating in the theme-parks industry, Disney and Six Flags are two very different companies. As such, determining which stock looks like the better buy will depend heavily on the preferences of individual investors.
For those seeking a comprehensive media and entertainment play backed by almost 100 years of successful operation, Disney should be the go-to investment option between the two stocks. But for investors intrigued by Six Flags' premiumization strategy and small-cap valuation, the pure-play parks operator could be the better buy.
