In this article, we evaluated two entertainment stocks, Netflix, Inc. (NFLX) and Walt Disney Company (DIS), to determine a better investment. I think investors would be wise to consider investing in NFLX while waiting for a suitable entry point into DIS.
The media and entertainment market is expected to reach an estimated value of $27.72 billion this year and is projected to grow at a CAGR of 7.8% to reach $40.36 billion by 2029. Digital media has become extremely popular given the convenience and variety of content provided by streaming. Companies like NFLX and DIS.
According to a study by Forbes Home, Americans spend an average of 3 hours and 9 minutes per day streaming digital media, and 99% of all households pay for at least one streaming service. NFLX is the most subscribed video streaming service with 260.28 million subscribers worldwide.
The video streaming market is expected to grow at a CAGR of 17.8% and reach $2.49 trillion by 2032. Streaming companies face several challenges, including increased competition, increasing costs of sourcing original content, and changing consumer viewing habits.
However, streaming platforms need to focus on user retention strategies, invest in new content, introduce price increases for existing subscription plans and ad-supported tiers, and effectively manage the subscription experience to ensure long-term growth. We are trying to address these challenges by becoming more competitive.
Forbes Home research shows that streaming users are more likely to abandon their Disney+ subscriptions if the subscription costs are lowered. According to the survey, 44% of streaming users believe they would quit the service if the subscription price increased. Meanwhile, the survey showed that 36% of streaming service users like NFLX's platform in terms of interface and user experience.
NFLX projects first-quarter 2024 revenue to increase 13% to $9.24 billion. The company expects net income to be $1.98 billion and EPS of $4.49, beating Wall Street's estimate of $4.10. Additionally, operating margin in FY2024 is expected to be 24%, up from the 22% to 23% range. The company expects double-digit sales growth for the full year 2024.
DIS expects fiscal 2024 EPS to increase at least 20% year over year to approximately $4.60. The company expects free cash flow generation to be approximately $8 billion for the year. The company said it is on pace to meet or exceed its goal of reducing costs by at least $7.5 billion.
DIS expects Disney+ Core to add 5.5 million to 6 million net subscribers in the second quarter of 2024, with positive average revenue per user (ARPU) momentum.
In terms of price performance, NFLX is the clear winner. Over the past six months, NFLX's stock price has increased 70.8%, compared to DIS's stock price of 46.5%. Similarly, NFLX stock is up 42.7% over the past nine months, while DIS stock is up 31.8%.
Here's why I think NFLX could perform better in the short term.
Recent financial results
NFLX's revenue for the fourth quarter of the fiscal year ended December 31, 2023 was $8.83 billion, an increase of 12.5% from the same period last year. Operating income was $1.5 billion, an increase of 172.1% from the same period last year. Net income and earnings per share for the quarter increased significantly compared to the same period last year, at $937.84 million and $2.11, respectively.
DIS's revenue for the first quarter ended December 30, 2023 was $23.55 billion, up slightly from the same period last year. The segment's total operating income amounted to $3.88 billion, an increase of 27.4% year-on-year. The company's net income attributable to DIS increased 49.4% year over year to $1.91 billion. Additionally, EPS increased 48.6% year over year to $1.04.
However, entertainment revenue fell 6.5% year over year to $9.98 billion. Cash, cash equivalents and restricted cash at the end of the period was $7.25 billion, down 14.9% from the same period last year.
Expected financial performance
NFLX's 2024 and 2025 EPS are expected to be $17.19 and $21.14, up 42.8% and 23% year over year, respectively. Similarly, revenue for fiscal years 2024 and 2025 is expected to be $38.54 billion and $43.11 billion, an increase of 14.3% and 11.9% year over year, respectively.
DIS's EPS for fiscal 2024 and 2025 is expected to increase 24.8% and 17.4% year over year to $4.69 and $5.50, respectively. Revenues for fiscal 2024 and 2025 are expected to be $91.86 billion and $96.74 billion, respectively, up 3.3% and 5.3% from the previous year.
Profitability
DIS's trailing twelve month revenue is 2.63x the revenue generated by NFLX. However, NFLX is more profitable with EBIT margin and EBITDA margin of 20.62% and 21.68%, respectively, compared to DIS's 11.57% and 17.54%. Also, NFLX's leveraged FCF margin is 57.48%, while DIS's is 8.26%.
evaluation
In terms of non-GAAP forward PEG, DIS's 1.56x is 24.8% higher than NFLX's 1.25x. However, NFLX's future EV/Sales of 7.40x is 158.7% higher than DIS's 2.86x.
power rating
NFLX has an overall rating of B, which equates to a Buy according to our proprietary POWR rating system. On the other hand, DIS has an overall rating of C, which corresponds to neutral. POWR ratings are calculated by considering 118 different factors, with each factor weighted to the best degree.
Our proprietary rating system also evaluates each stock based on eight different categories. NFLX's quality is B-grade, consistent with its high profitability. On the other hand, DIS has a quality rating of D, which is consistent with low profitability.
NFLX's favorable analyst forecasts justify a B grade for sentiment. Similarly, DIS gets an A grade for Sentiment, which is in line with positive analyst forecasts. Meanwhile, NFLX and DIS have value ratings of D grade, consistent with their stretched valuations.
NFLX ranks #17 out of 53 stocks in the Internet industry with a B rating, while DIS ranks #8 out of 11 stocks in the Entertainment – Media Producers industry.
In addition to the above, we also evaluated both stocks for their growth potential, momentum, and stability. Get all NFLX ratings here. Click here to view DIS ratings.
winner
The streaming industry is expected to perform well thanks to the introduction of ad-supported tiers, increased 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 last quarter exceeded expectations, and the company projects strong growth in fiscal 2024. The company is focused on building and investing in its advertising business, which it expects to drive significant revenue growth from 2025 onwards. As competitors cut content spending, NFLX is looking to invest in new content.
Meanwhile, DIS plans to cut costs by $7.5 billion and expects its streaming business to start turning a profit by the end of this year. However, the company's cable TV business continues to struggle with declining viewership. Furthermore, the stock is trading at a premium price.
Considering these factors, NFLX is a better choice than DIS.
Our research shows that investing in stocks with an overall rating of Strong Buy or Buy increases your odds of success. See all the top stocks in the Entertainment – Media Producers industry here. You can also check out the top-rated stocks in the Internet industry here.
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NFLX stock was trading at $630.70 per share on Monday afternoon, down $5.48 (-0.86%). Year-to-date, NFLX is up 29.54% on him. In comparison, the benchmark S&P 500 index rose 9.41% over the same period.
About the author: Abhishek Bhuyan
Abhishek began his professional journey as a financial journalist because of his keen interest in determining the fundamental factors that influence the future performance of financial products. more…
