There's really no debate about it: Walt Disney is one of the most dominant media and entertainment businesses on the face of the planet. It has a history spanning nearly 100 years, one full of fantastic storytelling and memorable experiences.
The House of Mouse has a track record of winning over fans through video entertainment. And keeping this background in mind, it's encouraging that the company launched its own flagship Disney+ streaming service in November 2019. As of Dec. 30, 2023, it counted 111.3 million subscribers, easily making it one of the most popular choices on the market.
But if you're looking for a magnificent streaming stock to add to your portfolio, forget about Disney. Buy and hold this industry leader instead.
Where's the growth?
The streaming business that deserves your attention is none other than Netflix (NFLX -0.31%). After adding 29.5 million net new customers in 2023, it has 260.3 million subscribers right now. Even on an already massive user base, the company is finding ways to increase its member count.
This is in stark contrast with Disney+. Yes, it deserves credit for reaching over 111 million customers in less than five years. However, there could be signs that it has reached a peak.
In the latest fiscal quarter (Q1 2024 ended Dec. 30), Disney+ Core (excluding Hotstar) saw its subscriber count shrink by 1% on a quarter-over-quarter basis. Executives pointed to price hikes as the reason for why more members chose to cancel their plans.
Pricing power is where Netflix truly shines. Last October, it raised prices on its Basic plan in the U.S. by $2 per month. However, that didn't prevent the company from adding 2.8 million net new users in the U.S. and Canada region in Q4, while also posting a 3% increase in average revenue per member.
Consumers are giving investors tremendous insights here. Netflix is the top streaming choice, even as its price goes up. That's something Disney+ hasn't been able to compete with thus far.
Disney is still losing money
When it comes to profitability, Netflix again runs circles around Walt Disney. Disney's direct-to-consumer (DTC) operations, which is where Disney+ and the stake in Hulu get reported, posted a $138 million operating loss last fiscal quarter. Credit is given for bringing this down from the nearly $1 billion loss in Q1 2023. Disney is embarking on a broader plan for the entire business to cut about $7.5 billion in expenses by the end of the current fiscal year.
But we can't ignore the fact the DTC segment keeps losing money. "We continue to expect to reach profitability at our combined streaming businesses in the fourth quarter of fiscal 2024," management wrote in the Q1 2024 earnings release. We'll see if this ends up happening.
But let me provide context on just how far behind Disney's DTC business is. Netflix reported almost $7 billion of operating income on $33.7 billion of revenue in 2023, translating into a stellar 21% margin. Even better, that operating margin has steadily climbed over time. And this year, executives believe it will come in at 24%.
As the first mover in the streaming wars, Netflix has reached a massive scale that not even Disney can hold a candle to. Netflix is set to generate $6 billion of free cash flow in 2024. It has cracked the profitability puzzle that is plaguing other streaming rivals.
Netflix shares have soared 178% in the past 18 months, so they aren't as cheap as they once were. Investors can buy the stock at a forward price-to-earnings ratio of 36.9. That's about a 44% premium to Disney. But it might be worth it for investors who want to own the very best enterprise in the streaming industry.
