Better Buy: Disney vs. Starbucks

Disney (NYSE: DIS) and Starbucks (NASDAQ: SBUX) are both experiencing disruptions to their operations due to the coronavirus pandemic. However, Starbucks is forecasting that the worst of the pandemic is behind it and that it will return to growth in 2021. That's not the case for Disney, as many of its operations are still not up and running, and the company is not yet certain when they will be allowed to resume.

Let's consider each company's prospects in a deeper dive to determine which is the better buy.

A man sitting in front of a computer, making a decision.

Image source: Getty images.

Disney looking to bounce back

One word that can describe Disney's fiscal year 2020 could be chaotic. Theme parks, cruise ships, movie releases, resorts, new content production, and sports broadcasting were all substantially disrupted because of the coronavirus pandemic.

The flip side is that the confluence of factors stemming from the outbreak allowed its newly created streaming service Disney+ to explode out of the gate and reach 73.7 million subscribers as of Oct. 3. At an average revenue per user (ARPU) of $4.52, Disney now has a new business that will bring in an estimated $4 billion annually. That's assuming the number of subscribers remains the same, but with the service slated to launch in additional countries, total subscribers are likely to increase.

Moreover, positive developments in the battle against COVID-19 might allow the rest of its businesses to return to normalcy by the summer of 2021. According to Disney, there is pent-up demand for all of the above-mentioned businesses once they get back up and running, based on early results from the partially opened theme parks and early reservations for cruises.

It appears that Disney is six months to a year away from putting the nightmare of the pandemic behind it and returning to operating at full capacity. But now it has a rapidly growing streaming business to support its slower-growing but highly profitable legacy businesses.

Starbucks is confident in its future

Starbucks, too, is having a rough year in 2020. The pandemic forced the company to shut down many of its locations and reopen only with drive-through or curbside pick-up. In contrast to Disney, Starbucks is confident in its fiscal year 2021, guiding investors that it expects to achieve comparable-store sales growth of 20.5% at the midpoint.

Moreover, it is planning to add 1,100 net new stores -- the vast majority of which will be in markets outside the U.S. That would be a roughly 3% growth rate in its store base from its current total of 32,660.

To help fuel continued growth, Starbucks made some changes during the pandemic. First, it introduced curbside pick-up. Then it altered its Starbucks rewards program, where members can now earn rewards even if they don't preload their cards; this should add members who were previously reluctant to join. Starbucks already has 19.3 million active members in the program, who tend to be higher-value customers.

Looking at the bigger picture, the hot drinks market is forecast to grow by a compounded annual rate of 10.3% between 2020 and 2025, and coffee is the largest component of the hot drink market. Starbucks is in a favorable position to benefit from that growth.

The verdict

DIS Gross Profit Margin (Annual) Chart

DIS Gross Profit Margin (Annual) data by YCharts

Both companies went through a difficult year due to the coronavirus pandemic, and both will likely remain household names for many years. However, investors should consider Disney if they had to pick between the two consumer discretionary stocks. The company's excellent profit margins beat Starbucks', and its excellent long-term prospects give it the edge in this battle.

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Parkev Tatevosian owns shares of Walt Disney. The Motley Fool owns shares of and recommends Starbucks and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short November 2020 $85 calls on Starbucks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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