Netflix Vs Disney Stock: Which Is Best?

Back in 1999, 100% of music industry revenues stemmed from physical sales. Every year for the next two decades they declined as streaming rose In prominence to the point where it now makes up the bulk of global sales.

For legacy music companies, streaming technology from Spotify (NYSE:SPOT) most prominently was a virtual death knell. As in the war between Blockbuster and Netflix, it was hard to see ahead of time how disruptive streaming music services would become.

Today, a similar battle rages between old and new entertainment companies, Disney (NYSE:DIS) and Netflix, respectively.

Will Disney’s core competence in content production win or the lead Netflix (NASDAQ:NFLX) has in technology edge out the Mouse House? In other words, between Netflix vs Disney stock, which is best? We’ve got a clear answer.

Credit: Prof. Aswath Damodaran

How Disney Led The Movie Industry?

The movie industry has been dominated by five studios over the past decade with Disney leading the pack. The other four include Universal, Paramount, Warner Bros, and Sony.

Between 2013-2022, these five studios were responsible for anywhere between 75-85% of box office sales.

The larger the studio, the more they control their own distribution typically. And Disney, as leader of the pack, ranked #1 for box office movie distribution since 1995. Warner Brothers and Sony came second and third while Miramax pulled up the rear, just behind Dreamworks SKG.

Disney earnings somewhere between $40 billion and $45 billion between 1995 and 2023 from distribution alone.

Studios typically earn about $0.50 for every $1 of box office sales with movie theaters taking the other half. However, the larger the studio and the bigger the box office hit, the more the studio can rake in, and sometimes it can receive a 60% share of theater sales.

You might be wondering why don’t studios simply buy theater brands, like the top 3 (AMC, Regal and Cinemark) and take 100% of the sales? Regulation is the reason why – for 72 years from 1948 it was forbidden for them to do so.

Nevertheless, the movie business was built on this structure whereby studios would make content, distribute it and exhibit it at theaters.

Then along came Netflix and tipped over the apple cart, so to speak.

How Netflix Disrupted a 100 Year Old Business

Netflix was founded in 1997 but it wasn’t until much later when it launched its streaming online movie business (it began by sending 3 DVDs to people’s homes and allowing them to watch those movies for as long as they wished, at which time they could return them).

By 2015, the impact of Netflix had not been fully felt. About 65% of 18-25 year olds still had either cable or satellite TV. 86% of those over 65 years of age had one or the other service.

But the next few years saw massive disruption and cord-cutting. By 2021, only 34% of the younger age group had a cable or satellite subscription. The older age groups maintained their monthly connection but even that cohort experienced a decline of 5 percentage points.

Interestingly, the 30-49 year old age group experienced a similar trend with 73% having subscriptions to legacy providers in 2015 and just 46% by 2021.

Netflix broke down the door to streaming choices for consumers and others soon followed. Why pay $80 a month to a cable provider when you could pay $8 to Netflix?

Or if you wanted a particular type of content on another platform, you could pay a similar rate elsewhere and still save a boatload of money by having two or three streaming subscriptions versus one cable or satellite fee.

Interestingly, in spite of the massive growth in streaming, revenues in the entertainment industry have largely been growing year-over-year for a few decades, even for cable.

Credit: Prof. Aswath Damodaran

Yet rising revenues have not translated to rising profits. Margins in the entertainment business have fallen, and in some cases plummeted in recent years. Movie business margins are just 5% now, representing a 75% decline since 2015.

An astonishing statistic is that across all streaming services, virtually all profits from streaming in aggregate accrue to Netflix.

You might be wondering how cable has stayed alive with all the cord-cutting, and the answer is that consumers still rely upon those providers for broadband, so they have been buttressed from the streaming torpedo attack over the past decade.

Disney vs Netflix Stock: Which Is Best?

The fallout from Netflix’s disruptive launch of streaming and its knock-on effects has been less severe on legacy companies valuations than might be expected.

Disney’s market cap in 2023 is about the same as it was in 2013. The same can be said of Comcast and Warner Bros valuations, which have largely held steady.

While streaming didn’t destroy the old-school entertainment firms businesses per se, it did result in enormous wealth accruing to Netflix, which grew at a compounded annual growth rate of 24.5% from 2013 to 2023.

Each company now faces is its own set of challenges. For Netflix, content quality is more variable than that produced by Disney.

For Disney, which has lost 300,000 streaming subscribers in recent months, the challenge is to broaden its content library without compromising quality and simultaneously deliver an A+ user experience that relies on cutting-edge technology as Netflix does.

So what’s the fallout in terms of which stock is best to buy?

When we look at the numbers, Disney generated $87.8 billion during the last twelve months versus $32.4 billion for Netflix.

Notably, Netflix manages to report operating income that is marginally less than Disney’s, even though its revenues are substantially lower. Disney has $7.7 billion of EBIT (operating income) compared to $5.6 billion reported by Netflix.

When crunching through the revenue and operating margin forecasts, Prof. Damodran has arrived at a price and value per share for both companies.

The Dean of Valuation, Prof. Aswath Damodoran estimates Netflix has a value per share of $238.08 while trading around $440 per share while Disney has a value per share of $87.52, suggesting close to 10% upside.

The bottom line is Disney is a better buy than Netflix at this time on a valuation basis.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.