Everyone knows Walt Disney (DIS -0.04%). Its TV networks, streaming services, and theme parks are popular among consumers. The company has been dealing with lots of changes in the past couple years, though, as CEO Bob Iger tries to focus on getting back to growth and improved profitability.

The market doesn't like this uncertainty. Consequently, shares of this top media and entertainment business dropped 46% in the past three years (as of Jan. 24), compared to the 27% gain of the S&P 500.

Investors might be thinking of buying Disney in the hopes things can turn around, which could lead to huge returns. But it's a better idea to consider another streaming stock.

Trouble at the House of Mouse

Disney's stock price should do well if there's considerable progress in the direct-to-consumer (DTC) segment, which houses the Disney+ streaming service. Launched in late 2019, Disney+ quickly amassed subscribers. As of Sept. 30, 2023, it counted 150 million global customers.

That's impressive, but there are some reasons to worry. For starters, the DTC segment is unprofitable, posting an operating loss of $420 million last fiscal quarter (Q4 2023 ended Sept. 30, 2023). Management expects profitability in the fourth quarter of fiscal 2024. If this ends up happening, it will likely be from cost cuts, as Disney plans to reduce annualized expenses by $7.5 billion across the board.

You'd rather see profitability achieved via strong customer gains that scale up the segment. By focusing on cutting costs, the business might be neglecting investments in growth opportunities, a move that could position it poorly to capture the secular streaming trend.

Even with the stock trading at a compelling forward price-to-earnings (P/E) ratio of just 21.4, investors are better off taking a closer look at Netflix (NFLX -0.63%).

Netflix is seeing strong momentum

While Disney sorts itself out, Netflix is firing on all cylinders. Netflix crushed analysts' fourth-quarter expectations, adding 13.1 million net new subscribers in the last three months of 2023. On a percentage basis, this figure grew 13% year over year, a faster pace than what Disney+ posted in its latest fiscal quarter. And Netflix now has 260 million customers, giving it much larger scale than Disney+.

Not only that, but Netflix's unit economics also are superior. Average revenue per user in the U.S. and Canada was an impressive $16.64 in Q4, 122% higher than the $7.50 for Disney+ Core (in the U.S. and Canada).

Even though Netflix's recent growth is outstanding, it's even more encouraging to see the profits. After reporting an operating margin of 16.9% last quarter, management expects this metric to come in at 24% for the full year. Disney's DTC division can only dream to one day hit this mark.

Netflix is also generating a lot of free cash flow, to the tune of $6.9 billion in 2023 and an estimated $6 billion this year. Executives are using this cash to repurchase shares.

I mentioned this above, but scale is a key factor that is benefiting Netflix. It is able to spread out the costs to develop and license content, which are fixed expenses, over a massive user base. Even when Netflix had about the same number of customers as Disney+ does currently, which was in early 2019, it was posting a double-digit operating margin. This doesn't give me confidence in the House of Mouse's ability to get its streaming operations into the black.

Netflix's forward P/E multiple of 34.2 is far more expensive than Disney's, but investors who value quality might take this deal any day of the week.