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Disney vs. Netflix: Which Company Deserves Your Cash?

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During the initial phases of the pandemic, the world was shut down, and people everywhere scrambled to find new sources of entertainment to remain busy and keep their cool. Looking back, it was a less-than-ideal situation that we found ourselves in, to say the absolute least.

However, online streaming services helped keep our spirits bright, and for those who held positions within these companies – the mood was even better. Subscribers came piling in for these services, and it handsomely paid off for many investors that had exposure to the streaming arena.

Two companies, in particular, Netflix (NFLX - Free Report) and Disney (DIS - Free Report) , both massively benefitted from the stay-at-home orders.

While all hope was lost for Disney’s beloved theme parks, the company was able to capitalize with a brand-new streaming service that had just hit the marketplace a few months prior – Disney Plus+. It was some pretty lucky timing for the company. Additionally, the company also has operations with the ESPN+ and Hulu streaming services.

Netflix had already established itself as the go-to for streaming entertainment, so there wasn’t much fear surrounding shares of the company whenever the world shut down.

Year-to-date, both stocks have suffered, but Disney shares have shown a much higher blend of valuable defense than Netflix shares have.

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It’s an all-out battle between these two streaming giants. Both companies have similar operations in the streaming arena, but there are always ways to decide which company deserves your hard-earned cash and has a higher probability of success in the future. Let’s find out.

Netflix

Netflix (NFLX - Free Report) was once a big-time winner over the last five years, becoming one of the most-watched stocks in the market. However, it’s been quite the fall from glory throughout 2022 and the latter part of 2021. The chart below illustrates NFLX’s share performance over the last five years.

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Image Source: Zacks Investment Research

Shares are now trading at an absolute fraction relative to all-time-highs of nearly $700. In fact, the meltdown of shares has caused its forward price-to-sales ratio to retrace down to 2.4X, nowhere near 2018 highs of 11.3X and well below the median of 7.7X over the last five years. Additionally, the metric’s current value is the lowest it’s ever been in this timeframe.

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Image Source: Zacks Investment Research

Subscriber count is undoubtedly the most critical metric that NFLX currently has. In FY20, the company’s subscriber count skyrocketed 32% from FY19, mainly attributed to stay-at-home orders during the pandemic.

However, the growth story has recently taken a turn for the worst; in its latest quarterly report, NFLX provided disheartening guidance that it was expecting a drop of nearly two million subscribers for the upcoming quarter. Additionally, its latest quarterly report revealed that NFLX had lost 200,000 subscribers during the quarter, its first subscriber loss in a decade. Netflix was expecting net subscriber adds of 2.5 million - shares plummeted 35% the next day.

Netflix’s balance sheet is debt-heavy; the company has utilized an immense amount of debt to fuel content creation. This development becomes even more alarming amid a hawkish Fed raising interest rates, thus curbing their ability to borrow so heavily and stunting future growth. NFLX’s cash ratio is 0.78, meaning it may have trouble paying back short-term obligations.

Disney

Disney (DIS - Free Report) has also had its fair share of share performance woes throughout 2022 and the latter parts of 2021. The five-year share performance chart below shows that shares have provided a marginal 2.5% gain.

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Image Source: Zacks Investment Research

Amid the sell-off, Disney’s forward price-to-sales ratio has decreased all the way down to 2.2X, well below the median of 3.1X over the last five years and is much lower than 2021 highs of 5.3X. Additionally, the valuation metric is the lowest ever since the early months of 2020.

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Image Source: Zacks Investment Research

Like NFLX, subscriber count is a critical metric for the company. The Disney+ service has been a significant success, giving consumers access to some of the most legendary movie franchises, such as Star Wars and Avengers.

Coming into the quarterly report, many believed that since NFLX lost subscribers throughout the quarter, Disney must have as well. This turned out to be wrong, as Disney boasted strong net subscriber adds for the quarter, capturing 7.9 million subscribers vs. the 4.5 million expected. Additionally, Disney+ remains on track to achieve its guidance of 230 – 260 million paid subscribers by the end of FY24, which would overtake NFLX in total subscribers.

The latest quarterly report revealed that Hulu subscribers surged 15%, and ESPN+ subscribers climbed 76% compared to the year-ago quarter. Off the back of robust results, DIS shares surged in after-hours trading.

Disney has also utilized debt to fuel its content creation and available options within its services. Similar to NFLX, this may be an issue for the company during a time when the Fed is raising interest rates. However, Disney’s cash ratio is 1.01, displaying an ability to meet short-term obligations.

Bottom Line

While Netflix was at one point a stock that investors would buy with zero hesitation, that story has significantly changed course. A slowdown in the company’s growth story has put shares at levels not seen in years, all while erasing the massive gains it had acquired.

On the other hand, Disney has burst onto the streaming service with its widely-regarded Disney+ service, and subscribers keep piling in. Disney+ hasn’t been the only success, as ESPN+ and Hulu continuously add new subscribers as well. Additionally, earnings for Disney are expected to tick up 1.2% in the current year, while Netflix estimates are forecasting an increase in earnings of 0.3%.

Disney has shown no slowdown in total subscribers, has a higher cash ratio, and has a much more attractive price-to-sales ratio. Furthermore, the growth story of Netflix has been thrown out the window. For these reasons, I believe that Disney would be a much better investment moving forward.


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