Better Buy: Netflix vs. Walt Disney
Netflix (NASDAQ: NFLX) and Walt Disney (NYSE: DIS) have both seen their share prices roiled by a lot of turbulence over the past 12 months as high inflation rates have run headlong into a maturing streaming industry.
But with Netflix and Disney both making significant changes over the past year, both could potentially be smart investments now. Some market watchers may wonder which entertainment company might be the better one. Let's explore.
Netflix has turned the ship around
Netflix started its fiscal 2022 with a stumble, reporting a loss of subscription video-on-demand (SVOD) subscribers for the first time in more than a decade. The following quarter was even worse, with the streamer shedding almost a million more customers.
Despite the early challenges, Netflix finished the year with just over 230 million paying users, up 11 million year over year, and an average revenue per user (ARPU) of $11.76, a bump from $11.67 in 2021.
As Netflix sees things, its rebounding growth was primarily due to serving up entertaining content to its customers. Or as co-CEO Ted Sarandos explained it during the company's last quarterlyearnings call "We grow engagement. We grow revenue. We grow profit."
Expanding beyond movie and TV streaming
Sarandos' understanding that engagement is key to Netflix's business model helps to explain the company's exploration beyond on-demand video.
In late 2021, the streamer entered the video game arena with the launch of dozens of games for iOS and Android devices, offered exclusively to Netflix subscribers. These have included many titles based on Netflix's own intellectual properties (IP), like shows such as NARCOS and Stranger Things.
In the period since, the company has also acquired multiple gaming studios and even hinted it could eventually make a move into the cloud gaming space.
And as if to indicate that the company is thinking about business opportunities beyond its subscriber base, Netflix recently announced Stranger Things: The First Shadow -- a live theatrical show that will open in London later this year. The move follows a promotional Glass Onion-themed escape room and a series of immersive costumed balls aimed at Bridgerton fans.
Disney's streaming fight
Despite Disney+ establishing itself as one of the most successful SVOD platforms in the world, Walt Disney's streaming business is not profitable. In 2022, the division lost roughly $4 billion. By comparison, the company's Parks, Experiences, and Products (PEP) unit generated $7.9 billion in operating profit.
Disney's struggles to make money from streaming have not gone unnoticed by Wall Street. At the start of 2023, the House of Mouse found itself in a proxy battle with activist investor Nelson Peltz, who accused the company of using its PEP operation to subsidize its SVOD efforts. Disney initially pushed back against Peltz, claiming he had no experience in the streaming space.
But when the company reported a loss of 2.4 million Disney+ customers in February 2023, it effectively capitulated to Peltz's demands by announcing a plan to reduce its overall workforce by 7,000 and cut $5.5 billion in overhead -- $3 billion of which will come from its content arm. The next day, Peltz called off his proxy campaign, saying: "Disney plans to do everything we wanted them to do."
While Disney's tangle with Peltz was resolved relatively quickly, the investor's complaints about the company using one part of its business to support another part are surely more a feature than a bug. Disney's many parks have always relied heavily on the vast bank of Disney characters to attract ticket-paying fans.
Indeed, as if to underline the point, Walt Disney Senior Executive Vice President and Chief Financial Officer Christine McCarthy noted during the company's first-quarter 2023earnings callthat a Marvel-themed Avengers Campus and tie-in hotel -- both at Disneyland Paris -- are proving "very popular and attracting a lot of consumers."
The best long-term bet
Despite the shine fading somewhat on Disney+, there's an argument to be made that Walt Disney is a smarter investment than Netflix over an extended period. Disney's restructuring plan has fended off a messy proxy battle, and its PEP unit has recovered well after COVID-19 lockdowns. Of course, investors may question the company's decision to pull back on content spending -- particularly with it feeding directly into its parks operation -- but after almost 100 years in business, the company certainly has a large vault of characters to lean on.
Netflix is, of course, starting to execute its own diversification strategy, but those efforts are still at such a nascent stage that they're negligible to the company's bottom line. That's not to say it couldn't successfully follow Walt Disney's playbook over time (as many others are), but as things stand, Netflix's reliance on monthly SVOD numbers makes it a less robust stock pick over the long term.
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Tom Wilton has had business dealings with Netflix but has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
