In this piece, I evaluated two entertainment stocks, Netflix, Inc. (NFLX) and The Walt Disney Company (DIS), to determine a better investment. I believe investors could consider investing in NFLX while waiting for an opportune entry point in DIS could be wise.
The media and entertainment market is projected to reach an estimated $27.72 billion this year and is predicted to grow at a CAGR of 7.8%, reaching $40.36 billion by 2029. Digital media has become extremely popular, given the convenience and variety of content offered by streaming companies such as NFLX and DIS.
According to a Forbes Home survey, Americans spend an average of three hours and nine minutes a day streaming digital media, and 99% of all households pay for at least one or more streaming services. NFLX is the most subscribed video streaming service, with 260.28 million subscribers worldwide.
The video streaming market is projected to grow at a CAGR of 17.8% to reach $2.49 trillion by 2032. Streaming companies face several challenges, including rising competition, increasing procurement costs for original content, and changing consumer viewing habits.
However, streaming platforms are trying to encounter these challenges by focusing on user retention strategies, investing in new content, introducing price increases on its existing subscription plans and ad-supported tiers, and managing subscriber experiences effectively, thereby enhancing long-term competitiveness.
The Forbes Home survey shows that streaming users are likelier to drop Disney+ subscriptions if subscription costs are reduced. The survey showed that 44% of streaming users would drop the service if subscription prices increased. Meanwhile, the survey showed that 36% of streaming service users liked NFLX’s platform in terms of its interface and user experience.
For the first quarter of fiscal 2024, NFLX predicts a 13% revenue growth to $9.24 billion. It expects net income to be $1.98 billion and EPS to be $4.49, higher than Wall Street’s estimates of $4.10. Also, its fiscal 2024 operating margin is forecasted to be 24%, up from a range of 22% to 23%. The company expects a double-digit revenue growth for the full year 2024.
DIS forecasts a minimum 20% rise in fiscal 2024 EPS over the previous year to about $4.60. It predicts free cash flow generation of approximately $8 billion for the year. The company said it was on pace to meet or exceed its goal of cutting costs by at least $7.5 billion.
DIS expects to add between 5.50 and 6 million net subscribers to Disney+ Core in the second quarter of 2024, with a positive momentum in Average Revenue per User (ARPU).
In terms of price performance, NFLX is the clear winner. NFLX’s stock has gained 70.8% over the past six months compared to DIS’ 46.5%. Similarly, NFLX’s stock has risen 42.7% over the past nine months, compared to DIS’ 31.8%.
Here are the reasons I think NFLX could perform better in the near term:
Recent Financial Results
For the fiscal fourth quarter that ended December 31, 2023, NFLX’s revenues rose 12.5% from the year-ago value to $8.83 billion. Its operating income stood at $1.50 billion, up 172.1% year-over-year. For the same quarter, its net income and earnings per share increased significantly over the prior-year quarter to $937.84 million and $2.11, respectively.
DIS’ revenues for the first quarter ended December 30, 2023, rose marginally year-over-year to $23.55 billion. Its total segment operating income came in at $3.88 billion, up 27.4% over the prior-year quarter. The company’s net income attributable to DIS rose 49.4% year-over-year to $1.91 billion. In addition, its EPS rose 48.6% from the year-ago value to $1.04.
However, its Entertainment revenues declined 6.5% year-over-year to $9.98 billion. Its cash, cash equivalents, and restricted cash, end of the period fell 14.9% year-over-year to $7.25 billion.
Expected Financial Performance
NFLX’s fiscal 2024 and 2025 EPS are expected to increase 42.8% and 23% year-over-year to $17.19 and $21.14, respectively. Likewise, its fiscal 2024 and 2025 revenue is expected to increase 14.3% and 11.9% year-over-year to $38.54 billion and $43.11 billion, respectively.
For fiscal 2024 and 2025, DIS’ EPS is expected to increase 24.8% and 17.4% year-over-year to $4.69 and $5.50, respectively. Its fiscal 2024 and 2025 revenue is expected to increase 3.3% and 5.3% year-over-year to $91.86 billion and $96.74 billion, respectively.
Profitability
DIS’ trailing-12-month revenue is 2.63 times what NFLX generates. However, NFLX is more profitable, with an EBIT margin and EBITDA margin of 20.62% and 21.68%, compared to DIS’ 11.57% and 17.54%, respectively. Also, NFLX’s levered FCF margin of 57.48% compares to DIS’ 8.26%.
Valuation
In terms of forward non-GAAP PEG, DIS’ 1.56x is 24.8% higher than NFLX’s 1.25x. However, NFLX’s forward EV/Sales of 7.40x is 158.7% higher than DIS’ 2.86x.
POWR Ratings
NFLX has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, DIS has an overall rating of C, which translates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NFLX has a B grade for Quality, which is in sync with its high profitability. On the other hand, DIS has a D grade for Quality, which is consistent with its weak profitability.
NFLX’s favorable analyst estimates justify its B grade for Sentiment. Similarly, DIS has an A grade for Sentiment, which is in sync with its favorable analyst estimates. Meanwhile, NFLX and DIS have a D grade for Value, which is in sync with their stretched valuation.
Of the 53 stocks in the B-rated Internet industry, NFLX is ranked #17, while DIS is ranked #8 out of 11 in the Entertainment – Media Producers industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Stability. Get all the ratings of NFLX here. Click here to view DIS’ ratings.
The Winner
The streaming industry is expected to perform well, thanks to the introduction of ad-supported tiers, increasing subscription prices, and a crackdown on password sharing. Both NFLX and DIS are expected to benefit from these trends.
NFLX subscriber additions of 13.1 million in the last quarter were higher than expected, and the company has projected strong growth for fiscal 2024. It is focusing on building and investing in its advertising business and expects it to drive substantial revenue growth in 2025 and beyond. At a time when its competitors cutting on content spend, NFLX is looking to invest in new content.
On the other hand, DIS is in line to cut costs by $7.5 billion and expects its streaming business to start delivering profits by the end of this year. However, the company’s cable television business continues to struggle with falling viewers. Moreover, the stock trades at an expensive valuation.
Considering these factors, NFLX is a better choice than DIS.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment – Media Producers industry here. One can also check the top-rated stocks of the Internet industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
NFLX shares were trading at $630.70 per share on Monday afternoon, down $5.48 (-0.86%). Year-to-date, NFLX has gained 29.54%, versus a 9.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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