The stock market soared to record highs in the first half of 2021, but not everyone has participated in the rally. Most notably in the media space, Netflix and Disney have seen their stocks stall out this year despite the fact they’ve established themselves as the clear leaders in streaming video.
While the S&P 500 surged 14% in the first six months of the year, Disney stock was down about 1.5% and Netflix rose roughly 1.5% during the same time period.
These muted moves follow a strong 2020 for both media giants. Sure, the bulk of streaming services saw usage skyrocket as most of the world locked down, but Netflix and Disney were at the top of the heap. As of the end of the first quarter, Netflix boasted 207 million global subscribers and Disney+ had 159 million.
The strength in subscriber growth boosted both Disney and Netflix stocks, too. In 2020, Disney shares gained 25% and Netflix advanced 67% compared with the broader market’s 16% increase.
So, what’s going on with the top two streamers in 2021?
Growth accelerated too quickly in the streaming space last year. For a mature streaming company like Netflix, to see nearly 37 million subscriber additions in one year was impressive considering competition was getting heated in the space, with new market entrants including Discovery+ and Paramount+.
But despite the fact Netflix warned Wall Street early on the pandemic was inducing a “pull-forward” effect that would sap its future subscriber growth, investors started to sour once the streamer reported sluggish Q1 results. And that is raising questions about where the next phase of growth for the company will come from.
That has renewed suggestions many analysts have made over the years that Netflix should consider either adding an ad-supported tier or sports content to its platform. Both could provide fresh revenue streams for a company that had only been focusing on recurring subscription revenue until now.
There are signs Netflix is looking outside its traditional revenue stream. An expansion into video games is reportedly in the offing. Then there was the recent launch of its exclusive merchandise e-commerce site. Netflix’s merch store may not be a meaningful contributor to its top line yet, but it is a move that could further grow the loyal fanbase of its most beloved shows and movies.
Netflix’s singularly focused business model proved to be beneficial during the pandemic, but the opposite was true for rival Disney. In hindsight, the launch of Disney+ in November 2019 was great timing ahead of the COVID pandemic, but as its streaming business took off, its core businesses were reeling. Disney’s theme parks and cruises had to shut down completely, major film releases had to be pushed back, and production of shows and movies were halted, which resulted in precious ad dollars lost.
Disney quantified that damage in its 2020 annual report. The most significant impact was to the company’s Parks, Experiences and Products segment, which took a $6.9 billion blow in operating income for the year. Before the pandemic, theme parks revenue had accounted for 40% of its total revenue.
Given all the challenges Disney’s core businesses faced last year, the stock was resilient thanks to Disney+. The incredible subscriber growth out of the gate for Disney+ in 2020 may have its own kind of pull-forward hangover, leaving many wondering if there will be as much momentum in 2021. So far, the growth has been disappointing. Disney reported just 103.6 million subscriber additions in its fiscal Q2, which was below Wall Street estimates of 109 million.
Investors stood behind the company’s streaming strategy as Disney+ grew much quicker than anyone ever anticipated; however, expectations for a bounceback in the other segments of Disney’s business are back.
The disruptions that COVID caused in 2020 are slowly abating, and there's finally a bright light at the end of the tunnel, as all of Disney’s parks are open and capacity restrictions have eased. While the financials aren’t quite back to pre-COVID levels, the recovery is well underway.
Disney plans to go all in on Disney+ and its direct-to-consumer strategy, spending a projected $8 billion-$9 billion over the next couple of years on content for the streamer. Spending to win has been a strategy Netflix perfected over the years, and now Disney wants in on the action. Whether it proves just as successful for Disney will be closely watched.
Investors have been taking a wait-and-see approach with Netflix and Disney stocks as we head into the second half of 2021. Recovery in the first half wasn’t quite as expected, but any meaningful rebound to business following the upcoming second-quarter results could provide a much needed boost for the stalled-out stocks of the two streaming leaders.