Amazon (AMZN 3.43%) and Disney (DIS -0.04%) are two very different companies, but they're both giants in their industries. They've also both captured investor attention -- deservedly so.
Amazon has made several breakthroughs this year that have led to a climbing stock price, but Disney stock is down this year and 58% off its highs from 2021. Which stock is the better buy right now?
The case for Amazon: Unmatched potential
For a stock that has been one of the best ever to own, Amazon gave investors pause last year when it reported sluggish sales, net losses, and supply chain problems. But if you didn't sweat the short term and held onto your shares, your investment would be 56% higher in 2023.
Getting the most out of your investment requires long-term thinking. Amazon still has excellent prospects, and that didn't change despite last year's (and continued) pressure due to external headwinds. The worry was that it wasn't necessarily external, but now that Amazon is demonstrating improvements in many areas and playing offense in new technologies, it's back in reassured investors' good graces.
Amazon's core e-commerce business is a juggernaut that powers the entire enterprise, and although its market share slightly slipped when almost every physical retailer went online at the beginning of the pandemic, it's holding stable now with 38% of all U.S. e-commerce. Its lead is so vast, with the next competitor (Walmart) at only 6%, that it would be nearly impossible to breach anytime soon. And with continual upgrades, it's only padding its lead.
Amazon delivered more than half of its orders to customers in its top 60 metro areas within one day in the second quarter. Management explained that its recent logistics overhaul from a national to a regional structure achieves two important goals simultaneously. One is that it gets products to customers faster, which generates higher sales. Regional deliveries increased by 10 percentage points to 76%. The second goal is that regional deliveries result in cheaper costs to Amazon. Miles traveled to customers declined 19% from last year in the second quarter.
Along with the reliable income from Amazon Web Services (AWS), this is leading to higher operating income. It increased from $3.3 billion last year to $7.7 billion this year in the second quarter.
Now that Amazon has gotten its costs under control and started to energize its profits, it's playing offense in many areas. Rarely a week goes by without another important announcement related to new features.
There were actually two important pieces of information for investors to digest this week. One is a $4 billion investment in artificial intelligence company Anthropic, a competitive maneuver as rival cloud-computing company Microsoft announced its own investment in OpenAI, which operates ChatGPT.
The second announcement was that it's going to start showing ads in Prime streaming or offer an ad-free tier for an extra $2.99 per Prime member. That looks like a strong move to compete with Netflix's and Disney's tiered streaming approach.
These are the kinds of aggressive moves Amazon is known for, so it should be comforting to investors to see it back on track. The future is wide open, and Amazon should remain a leader in its businesses for years, increasing profits and cash and creating shareholder value.
The case for Disney: Buy on the dip
Disney is having a very different kind of year. There's been some progress, but several problems are hampering its growth plans.
The parks segment is back in action. Sales increased 13% more than last year in the third fiscal quarter of 2023 (ended July 1), and operating income was up 11%. Demand has been strong despite price hikes, and management recently said that it would invest $60 billion in parks and experiences over the next 10 years, or about double recent investments.
The media segment, however, has been having some trouble. Disney+ has been rolled out in most global locations and isn't adding subscribers consistently. On top of that, it's still posting major operating losses. Streaming losses were $500 million in the third quarter, which was an improvement from more than $1 billion last year but still a ways off from profits. It's working to turn that around while still creating the necessary content to attract viewers and subscribers, which is proving to be challenging.
At the same time, the move to streaming is hurting Disney's legacy networks. That isn't helped by ad budgets, which drive sales for these networks, being slashed due to inflation. Linear network sales decreased 7% in the third quarter, while operating income declined 23%.
These are two distinct segments, but the major Disney magic happens from its flywheel effect. All of Disney's parts work together to generate consumer loyalty and enthusiasm, each block building on the other to create a Disney ecosystem that draws customers to their favorite characters, themes, products, and services. When one piece is endangered, it impacts the entire business.
The investment in parks and experiences is an attempt to strengthen the experience part of the flywheel. People who visit parks are the low-hanging fruit, and expanding its lineup of experiences, especially at different price points and in a variety of locations, lowers the bar for low-hanging fruit.
Disney is still demonstrating revenue increases, although it only grew 4% in the fiscal third quarter, and it's still profitable. The forest through the trees looks lush and green, but it's struggling in the near term.
Disney stock is down 7% this year, underperforming the S&P 500's 13% gain. At this price, it could be a buying opportunity.
I see one winner right now
It's probably clear at this point that I see Amazon as the better buy right now. It's managing better through its struggles and has a long growth runway both in core and new businesses.
Disney is likely to emerge from its own challenges in a better place, but it's murky right now. I wouldn't jump to buy its stock while it's still finding the right way forward.
