The entertainment industry has had a challenging few years, with pandemic closures dampening theme parks and box office revenue in 2020 and 2021 and a streaming war in 2022 ramping up content costs.
Competition between Walt Disney (DIS -1.45%) and Netflix (NFLX 1.57%) has grown intense within the last 12 months, with the House of Mouse stealing market share from Netflix. These companies were each victim of a sell-off; however, they remain two of the biggest names in entertainment and could have a lot to offer investors over the long term.
According to Grand View Research, the streaming market was worth $59.1 billion in 2021 and will see a compound annual growth rate of 21.3% until 2030. As a result, a sell-off may have prompted an excellent opportunity to invest in those at the top of the industry.
So, is your money better off with Disney or Netflix? Let's find out.
Disney
Disney's shares have plunged 39% year over year, with its latest quarter concerning investors over its hefty content spend. In 2022, the company spent about $30 billion on content, primarily to fuel Disney+ as it climbed its way to the top of streaming.
This significant investment led to operating income in Disney's media and entertainment segment in the fourth quarter of 2022 falling 91% year over year to $83 million. The quarter was saved by its parks business, which saw revenue soar 36% year over year to $12.7 billion, while the segment's operating income more than doubled to $1.5 billion.
Despite investor concern, Disney's considerable spending on content has seemingly paid off, as it attained the most streaming subscribers in the industry in Q3 2022 and retained the top spot in Q4, with 236 million members versus Netflix's 223 million.
Having stolen the streaming crown from Netflix, Disney reassured investors in its Q4 report that it expected operating losses to "narrow going forward" as it works toward achieving profitability for Disney+ in fiscal 2024.
Moreover, Disney has started 2023 off with a bang, as Avatar: The Way of Water hit $1.7 billion at the box office on Jan. 8, becoming the seventh-highest-grossing film in history after only four weeks. Variety reported that The Avatar sequel cost $350 million to produce, suggesting Disney has hit profitability with the new film.
With plenty more highly anticipated movies due to release in 2023, such as multiple Marvel films and the final installment of the Indiana Jones franchise, Disney could enjoy a significant boost to its media segment. Along with a booming parks business and the most subscribers in streaming, Disney's stock is a compelling buy in 2023.
Netflix
Like Disney, 2022 was a difficult year for Netflix, with its stock falling 39% since last January. After years as the undisputed king of streaming, increased competition from companies like Disney, Warner Bros. Discovery, and Apple culminated in over 1 million subscriber losses in Netflix's first two quarters.
The company has since seen a return to subscriber growth, gaining 2.4 million net new members in Q3 2022. However, its stock price suggests investors are still not convinced about the company's future.
Netflix has responded to recent headwinds by making moves to diversify its business, which previously relied almost 100% on revenue from memberships. In November, the company partnered with Microsoft to launch an ad-supported tier, entering the lucrative digital advertising market and cowing to increased consumer demand for low-cost, ad-supported options in the streaming industry. In addition, this year will provide Netflix time to fine-tune its ad offerings and grow its advertising earnings.
Additionally, the streaming titan launched Netflix Games in November 2021 and has spent the last 12 months expanding the platform by adding to its mobile game library and acquiring game developers to fuel the service. Netflix has also partnered with some of the industry's biggest studios to create film/TV adaptions of popular games and mobile versions of existing franchises.
Netflix has also voiced interest in venturing into cloud gaming, which could see it offer more intensive, higher-tier titles. The company's streaming platform initially launched as a free service added to its mail-in DVD subscription, later becoming a separate membership when popularity grew. Netflix could be using the same tactic with its games service, playing the long game in boosting revenue with a separate subscription service in the future.
An investment in Disney's or Netflix's stock is best to buy and hold long term, as both companies need time to recover from a challenging 2022. However, comparing these businesses directly, Disney shares look like the better buy today.
Revenue diversity is crucial for reliability, and although Netflix has made positive moves toward diversification, Disney is the stronger business. Its dominating positions at the box office, theme parks, and now streaming will likely provide significant gains over the long term and make Disney worth an investment in 2023.