In November 2019, Disney launched its much-awaited video streaming service—Disney Plus. This is the latest in a long list of streaming services since Netflix pioneered the industry. Notably, Amazon and Apple have streaming services—and they have deep pockets to fund these businesses.
The difference for Disney is that the company owns a very large catalogue of content. That means it doesn’t have to spend money buying or producing content like its competitors do.
Netflix - one of the greaterst growth stories ever
Netflix has been a market darling for a long time. The stock listed in 2002 at around $1 a share, and by the end of 2010 was already up 2,600%, or 325% a year. In May 2018 it traded as high as $420, making it one of the best performing shares in history.
Since then the share has traded in a $190 range as investors have weighed up the impact of competition and the fact that the company struggles to turn a profit. Moreover, the company has struggled to grow its subscriber numbers in North America and has even begun to lose customers to competing brands.
Netflix now has 158 million paying subscribers around the globe. This gives it annual revenues of over $18 billion to work with.
There are a lot of competitors entering the market, but Netflix has a strong enough position to defend.
Disney - building a content empire
The Walt Disney Company is well known for its animated movies that date back to the 1930s, as well as other movies it has made over the years. Over the last two decades, the company has been on a shopping spree buying other well-known media assets.
Pixar, the animation studio that produced Toy Story, Finding Nemo and other box office hits were acquired in 2006. Earlier this year, Disney also acquired 21st Century Fox which produces The Simpsons and owns many other media assets. Disney also owns Marvel, Star Wars, ESPN, and Hulu, which have been included in its subscription bundles.
Of course, Disney owns more than just media assets. Its theme parks bring in over $20 billion a year, and it has earned around $14 billion in the last year from new movie releases. Total annual revenue of $69 billion dwarfs the $18 billion that Netflix brings in every year.
The verdict: Disney plus vs Netflix
It’s estimated that Disney Plus won 24 million subscribers in its first month. That was the result of pent up demand, so the growth rate will likely slow quite quickly. Still, 24 million subscribers at $6.99 each imply annual revenue of $2 billion. That’s about 2.8% of the company’s current annual sales, so it won’t make a big difference for some time. However, in the next few years, it may well become Disney’s main growth driver.
Disney’s stock price has preempted the launch of its streaming service and is already up 40% since Disney Plus was announced in March. This is despite several disappointing earnings releases. There is a very real risk that Disney is now overvalued and the forward PE of 23 is already higher than the trailing multiple. Disney will also need to spend more rolling out the streaming service globally.
The market may well be disappointed by Disney’s results in the next year. A selloff would, however, provide long-term investors with a better opportunity.
Netflix trades on a forward multiple of 60, which is high, but not excessive when you look at its historical growth rate. The company also has a history of surprising on the upside when investors begin to question its future. For Netflix, it really depends on how long the company can keep adding international subscribers. The global market is far from saturated, and there is room for growth. But, if subscriber growth does slow, the stock price will react. Netflix subscriptions are twice the price of Disney’s basic package—but it will take time for Disney to begin competing around the world.
Netflix’s stock price seems to be targeting resistance at $370. It may struggle at that level, but if the price does break higher, the technical picture will be very bullish.
As you can see it’s very difficult to make a long-term call on either stock. Disney is expensive but should perform in the long term. That doesn’t mean its time to write off Netflix though. If anything, it’s worth accumulating both over time.
CFDs on Netflix, Disney, Apple, and Amazon can all be traded on the One Financial Markets platform.