Although many streaming companies operate these days, most investors tend to opt for them Netflix (NASDAQ: NFLX) and, lately, Disney (NYSE: DIS). Netflix pioneered the industry, and as it grew, it put pressure on Disney’s pay-TV offerings as customers increasingly cut the cable. Disney eventually responded with its own streaming services.
However, investors should keep in mind that the two communication acts are not apples-to-apples compared to each other. Netflix only offers streaming services, while Disney is a media and entertainment conglomerate.
Still, with both companies heavily involved in both streaming and content creation, they share a lot in common. They can both also benefit from a compound annual growth rate (CAGR) of 20.4% in the global streaming sector through 2027.
Determining which company can become a more profitable investment takes a greater understanding of the financial and the companies themselves.
Image Source: Getty Images.
Where Disney stock stands
Disney has been operating as an entertainment company for almost 100 years. During that time, it has produced and purchased a content library that is unauthorized by any other company.
Lately, Disney’s various streaming services have attracted a lot of interest. Disney + launched in November 2019 and already has 57.5 million subscribers. ESPN + subscriptions have more than doubled in the past year, while Hulu subscriptions have grown by more than 27% in the last 12 months.
However, this streaming growth does not make Disney a slam-dunk investment. Disney + is part of its direct-to-consumer and international (DTCI) division, a division of the company that accounted for less than 20% of Disney’s total revenue in the second quarter of 2019. of the total turnover went to more than one third.
However, this is due in part to deep revenue declining in other divisions. Thanks to the effects of COVID-19 on the parks, experiences, and products and divisions of the studio entertainment, total revenue fell by 42%. This reduced net income by 72%, which more than ignores the success of Disney +. Year to date, Disney stock has lost 14% of its value.
DIS data by YCharts
Hence, Disney trades at a projected price-to-earnings (P / E) ratio of nearly 50. This is greater than its average forward multiple of about 20.
However, analysts also forecast a profit increase of 84% for next year, as Disney will hopefully move past the pandemic. That would give Disney stock a more reasonable rating and position it to ultimately benefit from its success in the streaming media space.
Investors and Netflix stock
Streaming success is nothing new for Netflix. It has grown to nearly 193 million paid subscribers. This comes over an annual growth rate of 27.3%. While that compares with the growth rates for streaming subscriptions seen with both Disney + and ESPN +, Netflix still leads the streaming industry.
The pandemic has turned into a strange but cost-effective situation for Netflix. COVID-19 has caused an increased demand for streaming media. It has also paused production on many programs. This is significant because Netflix has borne a heavy financial burden in producing its programs. As a result, debt levels have risen significantly over the last few years.
For the previous four years, free cash flow came within $ 899 million. This is higher than the net income of $ 720 million due to non-monetary costs. However, the long-term debt of $ 15.3 billion increased by more than $ 500 million during fiscal 2020.
So far, investors have ignored these issues. Netflix stock has risen more than 52% since the beginning of the year.
NFLX data by YCharts
Investors will pay a premium for this growth, as they trade at just over 80 times forward earnings. However, the 49.9% revenue growth forecast for this year should make it more palatable.
The profit increases are likely to come at a price. A return to production is likely to bring the company back to negative free cash flow and higher debt levels. Moreover, increasing competition makes a potential price increase riskier.
Netflix serves foreign markets such as India that could help continue its rapid growth once the US reaches a saturation point. However, if Netflix can find no way to stay cash flow positive after losing the pandemic, it could pose problems for the streaming giant.
Disney and Netflix?
Both stocks should perform well in the near future. Disney’s finances will improve if theme parks, cruise ships, and movie theaters can be rebuilt. Moreover, Netflix should continue to flourish with the global streaming media market.
However, if I have to pick one for the long term, I choose Disney. Disney is running a more diversified business. More importantly, it has a valuable content library. No matter how much damage Netflix inflicts on its balance in the content race, I do not believe it will overtake Disney.
While Netflix is likely to remain one of the top streaming companies, Disney is in a much stronger position to survive both turmoil and profit from its existing assets.
