Disney’s investor day may have been last week, but the feeling of shock and awe has barely subsided. (Get the top 10 takeaways from the company’s all-out earnings call.)
First there was that jaw-dropping disclosure of 86.8 million paid subscribers globally — just one year after launch. That was followed by a huge boost of the subscriber forecast to between 230 million and 260 million paid Disney+ subscribers by the end of fiscal 2024 — up from its previous guidance of 60 million to 90 million. And then came the pièce de résistance: hiking the price of Disney+ in the U.S. by one buck, to $7.99 per month.
Astronomical sub growth, a slew of fresh original content and pricing power — there’s only one other company we’re accustomed to seeing all that from: Netflix.
So now that Disney+ could actually be in striking distance of Netflix, it begs the question: Which company is the better bet for investors?
It’s important to keep in mind this is not an apples-to-apples comparison. While Netflix is a pure-play streaming company, Disney is a conglomerate that also operates theme parks, film and TV production in addition to streaming.
And both companies are not cheap when you look at their valuations. Disney currently trades around 26 times estimated 2024 earnings, while Netflix trades about 29 times estimated 2024 earnings.
Looking at the way both Disney and Netflix stocks traded this year, both companies have outperformed the broader market, and strong performances from streaming helped fuel the gains. With just a handful of trading days left in the year, Disney stock surged 17% so far in 2020, while Netflix jumped 61% and the S&P 500 rose 13% during the same time period.
If you’re looking at their stock performances this year, Netflix stock may have run a little too far too fast when you compare it with its disappointing Q4 sub growth outlook of just 6 million paid sub additions versus 8.8 million added in Q4 of 2019.
Meanwhile, Disney’s stock may be near all-time highs and its market cap may have blown past $300 billion, but that doesn’t mean the stock doesn’t have more room to run given the amount of growth projected over the next few years.
But while Disney’s theme parks and production businesses are getting wrecked amid the COVID-19 pandemic, those challenges are likely temporary. These businesses are expected to make a rather sizable comeback once the vaccine is widely distributed and the economic blow from the pandemic stabilizes.
However, a return to normal may not be as beneficial for Netflix, and management seems to think so, too. After seeing massive subscriber growth during in the first half of 2020, “The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” Netflix said in its Q3 shareholder letter. “In turn, we expect paid net adds are likely to be down year over year in the first half of 2021 as compared to the big spike in paid net adds we experienced in the first half of 2020.”
Additionally, Netflix is a much more mature streaming company than Disney. It’s more likely to see growth eventually slow over time. The deceleration doesn’t necessarily imply that the company has lost value, it just simply means it’s harder to lure in new consumers as rapidly as it once did.
Netflix has had a reputation for aggressively spending money on content, though its debt load ballooned along with it. Following its Q3 earnings results, Netflix’s management mentioned it expects free cash flow of $2 billion in 2020, which is much better than previous estimates for break-even or positive but still a far cry from the cash Disney typically can generate through its theme parks business.
Disney is also ramping up its content spend. The company revealed at investor day that it plans to spend $8 billion to $9 billion on Disney+ by the end of fiscal 2024, up from the previously anticipated mid-$4 billion range.
But ramping up content comes at a price. Disney consumers in the U.S. will have to shell out an additional dollar per month for Disney+, and investors will not receive their semi-annual dividend payment in January as a result of what management said is “limited visibility” due to COVID and its decision to prioritize investment in DTC initiatives.
Passing on some of the cost to Disney consumers and investors is a short-term growing pain and will help the DTC portfolio grow in the long term. More DTC growth equals more stock gains down the line.
So, which could be the better bet over the next three years? All signs point to Disney. The company just recently shifted toward a streaming-focused business model, and its theme parks and movie/TV businesses are going to eventually make a comeback if all goes according to plan on the vaccine front.
Netflix’s bull case is just not as strong as Disney’s anymore. The company is still able to add paid subs on a quarter-to-quarter basis, international expansion is proving impressive, and its content library remains robust, but some worry the best times are in the rearview at this point. Without a refreshed strategy to take on all the new entrants in the streaming wars, Netflix could see itself fall behind Disney in Wall Street’s eyes.