Amazon (AMZN 0.52%) and Walt Disney (DIS -0.13%) are two of the most hotly debated stocks on the market today. They operate in different industries, but they're both huge entities with varied businesses that are chock-full of moving parts. Are they both on the "winners keep winning" team? Is there anything that makes one of them a better buy than the other today?
There's a lot to analyze here, so let's roll up our sleeves and get to work.
Amazon is muddling through tough conditions
Both Amazon and Disney have enjoyed fabulous growth over many decades, benefiting immensely under favorable market conditions. They both stand out in that way, having leveraged a positive economic climate to grow their businesses and leave rivals in the dust.
Amazon got a big boost at the beginning of the pandemic, when all of its units flourished. Now, it's struggling to match those incredible numbers, winding down infrastructure it quickly built up to meet soaring demand and managing through increased costs.
In the 2022 fourth quarter, revenue increased 9% over the prior year, which beat internal guidance. But the past few quarters have seen a huge slowdown, and even Amazon Web Services (AWS), which has been a reliable generator of high growth, has been decelerating. Q4 AWS sales increased 20% over the prior year, whereas up until now year-over-year sales have increased 30%.
In 2022, Amazon also posted its first annual net loss since 2014. Much of that was due to its investment in Rivian Automotive, but even backing that out and looking at operating income, that fell from $24.9 billion last year to $12.2 billion in 2022.
Disney is getting back on its feet
Disney, on the other hand, was severely impacted at the beginning of the pandemic because it had to close down all of its parks and in-person experiences, which at the time comprised its biggest segment. Revenue literally came down to $0 for some time from certain activities. However, it was somewhat offset by the newly launched Disney+ streaming service, which demonstrated incredible growth.
Now parks have reopened to a fantastic reception, and management has been able to raise prices because demand is so strong. At the same time, streaming growth has slowed, and subscriptions actually declined year over year in the first quarter of fiscal 2023 (ended Dec. 31). Revenue increased a tepid 8% over last year in the first quarter.
Losses at Disney+ have been making investors nervous, and already at the end of the fourth quarter management had said it would begin slowing spending. The increase in streaming losses in the first quarter was narrower than in the previous quarter, but there's still a lot of work to do there. Management reiterated that it expects Disney+ to be profitable by the end of 2024.
Still, Disney's overall operating margin is a lot better than Amazon's, both in the current environment and even more so when the economy is doing well.
AMZN Operating Margin (Quarterly) data by YCharts
Amazon had a very smooth CEO transition last year when Jeff Bezos handed over the reins to Andy Jassy, but Disney has experienced a dramatic CEO change as the board removed Bob Chapek and reinstated Bob Iger. He has already made sweeping changes, and the market is receiving his return very favorably. However, there's some built-in volatility because he's only back in the driver's seat for a two-year run.
Tremendous future opportunities
Despite the current pressure, both of these companies are well-seasoned in how to grow profitably, and they both have plenty of new products and services to keep their cash registers ringing.
Amazon is launching an entirely new healthcare platform after acquiring One Medical last year, and its ad business continues to grow nicely. Amazon Prime continues to generate healthy sales and gain new members. The company is also making headway with its just-walk-out, cashierless technology, which it's using successfully in its own physical stores and is also licensing out to clients. There doesn't seem to be any industry that's off limits to management's thinking.
Meanwhile, Disney is pumping out new content, both on its streaming platforms and in theaters. Avatar: The Way of Water was released in December and has already worked its way up to become the fourth-highest-grossing film in history.
Marvel has been a huge asset since Disney acquired it in 2009, under Iger's direction, and accounted for three of the top 10 highest-grossing films of 2022. Marvel has three movies scheduled for release in 2023 and a film slate straight through 2026 in addition to streaming content.
Iger mentioned that Disney's studios are also working on new sequels to Toy Story, Frozen, and Zootopia, and these kinds of franchises give Disney almost endless opportunities to expand sales.
Where does valuation fit in?
Amazon stock trades at a price-to-sales (P/S) ratio of 1.9, while Disney stock trades at 2.3 times sales. Both of these are low valuations for companies that have strong potential.
AMZN PS Ratio data by YCharts
Something I would note about this chart is that both P/S ratios have been moving in tandem over the past year, even though they weren't in previous years. When investors are more cautious, they tend to price stocks more firmly in line with current performance. Both of these stocks look cheap today when compared with both historical trends as well as potential.
Which stock is the better buy?
The contest looks pretty close here. Both companies are industry leaders with long-term potential that are experiencing pressure in the current climate. They demonstrated almost the same amount of revenue growth in the most recent quarter, although for Disney it topped $23 billion and for Amazon it topped $149 billion.
If I had to choose one, I would say Amazon is more of a sure thing because of its steady Prime and AWS businesses, and its ability to dominate different industries. But if you're looking to add a long-term winner to your portfolio, either of these will do. I frequently recommend them both.
