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Streaming Losses to Hurt Disney's Chances Against AMZN, AAPL

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Disney (DIS - Free Report) is showing serious intent to become the closest challenger to Netflix (NFLX - Free Report) in the streaming service space, backed by its bigger content package, distributed across three services, namely Hulu, ESPN+ and the upcoming Disney+.

However, the company’s profits have been under pressure due to heavy investments in streaming services to survive amid stiff competition from Netflix, Amazon (AMZN - Free Report) and Apple (AAPL - Free Report) . This is now expected to continue at least over the next couple of years.

Hulu, ESPN+ & Disney+: Not Profitable Now

Hulu and ESPN+, two major growth drivers of Disney’s streaming service portfolio, are not expected to report profits any time soon. While Hulu is projected to report operating loss of $1.5 billion in fiscal 2019, ESPN+ is estimated to post operating loss of $650 million in both fiscal 2019 and 2020.

Disney expects Hulu to be profitable by fiscal 2023 or 2024. Moreover, paid subscribers are expected between 40 million and 60 million compared with 25 million (23 million paid) at present. On the flip side, the company expects ESPN+ to attract 8-12 million paying subscribers by the end of 2024.

Additionally, Disney+ is expected to report loss close to $1 billion in fiscal 2020. The service is expected to attract 60-90 million subscribers and be profitable by fiscal 2024. Notably, the company is expected to spend close to $1 billion in fiscal 2020 and mid-$2 billion in fiscal 2024 on Disney+.

Apple, Amazon’s Cash Generating Ability Gives Them an Edge

Increasing competition in the streaming space is compelling providers, both incumbents like Netflix and Amazon, and new comers like Apple and Disney, to spend more on content and marketing. However, this has led to increased cash burn, which doesn’t bode well for Netflix and Disney investors.

Year-to-date Price Performance




 
For instance, Netflix spent almost $13 billion on content in 2018. The company’s streaming content obligations were $19.3 billion at the end of fourth-quarter 2018. Netflix expects free cash outflow rate in 2019 to be similar to that in 2018 ($3 billion).

Further, Disney generated free cash flow of $904 million in fourth-quarter 2018 compared with $2.65 billion in the previous quarter. Since the company is expected to increase its investments in steaming service, free cash flow growth remains under pressure.  

This is why we believe that Amazon and Apple are well positioned to be the most profitable companies in the streaming market.

Notably, Amazon is also spending aggressively to promote Prime Video. However, the company’s strong free cash flow ($19.4 billion for the trailing twelve months ended Dec 31, 2018) generation ability, driven by solid retail business and cloud dominance, is a key catalyst.

Apple’s cash trove of $245 billion positions it well to support its upcoming Apple TV+ service.  Moreover, the company’s strong installed base of more than 1.4 billion active devices is a key differentiator.

Zacks Rank

While both Apple and Netflix currently have a Zacks Rank #3 (Hold), Amazon carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

However, Disney currently has a Zacks Rank #4 (Sell).

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The Walt Disney Company (DIS) - free report >>

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Amazon.com, Inc. (AMZN) - free report >>

Apple Inc. (AAPL) - free report >>

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