An Established Giant: The Possible Reason Why Disney (DIS) is Priced Higher Than Netflix (NFLX)

September 12, 2022
  •  Updated
September 12, 2022
NYSE:DIS
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Analysis summary:

  • Both Netflix and Disney are in the entertainment media business, but their offerings are quite different. Netflix is known for its original programming, while Disney is known for its classic animation, live-action films and theme parks.
  • Investors seem to be pricing Disney based on its future potential, while Netflix's is being priced on its near-term performance.
  • Disney is expected to have a much higher bottom line growth, thanks to its higher operating margin, while Netflix may have difficulties recovering if it does not manage the content spending.

Netflix, Inc. ( NASDAQ:NFLX ) and Disney ( NYSE:DIS ) are two entertainment giants who have offerings that are quite different from one another. Netflix is focused on streaming content, while Disney has a larger presence in the theme park industry. Both companies have been impacted by the current downturn in consumer spending. However, investors seem to be more confident in Disney's ability to recover than Netflix.

In today's analysis, we will review the business performance, future estimates of both companies, and compare them on a relative basis.

Slightly Different Business Models

Netflix is a streaming service for movies , TV shows , and documentaries , while Disney is an entertainment company that produces movies , TV shows , merchandise , and theme parks .

Netflix is known for its original programming , such as " Str anger Things " and " Orange is the New Black ," while Disney is known for its classic animation and live - action films , such as " Snow White and the Seven Dwar fs " and " The Lion King ." Disney also has a large presence in the theme park industry , with parks around the world .

Netflix is a leading entertainment service with approximately 221 million paid members hips in over 190 countries . The company 's primary focus is on growing its streaming membership business globally . Netflix offers a variety of content , including TV series , documentaries , feature films , and mobile games. The company is continuously improving its members ' experience by expanding its content offerings and enhancing its user interface .

They have recently announced that they will be adding an advertising-supported tier to their service in 2023. This new tier will be a lower-priced option that will allow for ads. Microsoft ( NASDAQ:MSFT ) has been announced as their technology and sales partner for this new venture. Paid sharing is also something that they are working on and plan to roll out in 2023.

Netflix is Getting Back Up In Q2

Despite the challenges posed by foreign exchange, Netflix was able to deliver strong year-over-year growth thanks to its focus on improving the product, content, and marketing. The company is in a position of strength with its $30 billion-plus in revenue, $6 billion in operating profit last year, growing free cash flow, and strong balance sheet.

Netflix's Q2 results were better-than-expected on membership growth, and foreign exchange was worse-than-expected (stronger US dollar), resulting in 9% revenue growth (13% constant currency). Netflix reported $8.0b in revenue, roughly in-line with analyst forecasts, and statutory earnings per share (EPS) of $3.20 beat expectations, being 9.0% higher than what the analysts expected.

The second quarter results were driven by growth in paid memberships and Average Revenue per Membership (ARM). Foreign exchange was a headwind, however, as the strong US dollar resulted in a -$339 million impact on revenue.

Forecasts Indicate a Continuation of Growth

Looking ahead to the third quarter, Netflix's management expects to continue to feel the impact of foreign exchange headwinds. The company is forecasting 5% revenue growth, which translates into 12% year-over-year growth on a constant currency basis. Excluding the impact of currency, operating profit growth would be -3% year-over-year and operating margin would be 20%. Netflix is also forecasting paid net adds of +1.0 million in the third quarter, compared to 4.4 million in the year-ago quarter, indicating a slowdown in user acquisition.

On the other side of management's guidance, we have the estimates from the 39 analysts that are covering the company. Analysts are predicting revenues of $31.7b in 2022. This would reflect a reasonable 2.1% improvement in sales compared to the last 12 months. EPS are expected to descend 11% to $10.22 in the same period.

The chart below summarizes the growth expectations for Netflix:

View our latest analysis for Netflix

earnings-and-revenue-growth
NasdaqGS:NFLX Earnings and Revenue Growth September 12th 2022

Re-Caping Disney's Latest Quarter

Disney 's latest earnings show an increase in revenue and diluted earnings per share from continuing operations . Revenues increased by 26% compared to the same quarter last year.  Net income increased to $1.4 billion from $0.9 billion. EPS increased to $0.77 from $0.50 in the prior-year quarter. The EPS increase for the quarter was due to higher segment operating income. The increase at theme parks and resorts was due to higher volumes, and higher average per capita ticket revenue.

On a trailing twelve-month basis, Walt Disney beat revenue expectations by 2.4%, recording sales of $22b. While EPS came in at $0.77, some 8.1% short of analyst estimates.

See our latest analysis for Walt Disney

earnings-and-revenue-growth
NYSE:DIS Earnings and Revenue Growth September 12th 2022

The most recent average estimates for Walt Disney from 28 analysts is for revenues of $94.2b in 2023 which, would mark a notable 16% increase on its sales over the past 12 months. EPS are predicted to recover 167% to $4.67.

What This Means for Investors

Netflix is expected to grow its top line at a slower pace than Disney over the next couple of years . While Disney is also expected to have a much higher bottom line growth .

This may give us a hint as to why investors are retaining a 65.8x PE valuation for Disney, vs the 20x PE for Netflix. It seems that Netflix is being priced based on near term performance, as opposed to Disney, where the expectations are much higher for the bottom line. Disney was making $9b to $13b between 2018 and 2020, and it seems that investors are expecting that the company will have an easier time recovering these profits, on top of the expected synergies from Disney+ streaming.

Netflix on the other hand seems to have fallen from the grace of investors since the beginning of 2022, and has difficulties recovering ever since. The 20x PE seems fair for the stock, but the key difference is that investors are now pricing the company based on the near term performance, vs the previous pricing, which seems to have been grounded on the future potential of Netflix. Both macro and content strategy factors may have impacted the change in investor sentiment, and the company may have a lot of work before it can regain the confidence of shareholders. 

The Macro Cycle

Consumer spending is currently in a downturn, and discretionary stocks are taking a hit on the valuation. For investors that believe in the future of these companies, it may be a great time to dig deeper while the price is depressed. However, we should note that we cannot't know how long the downturn will last, so a continuous investing strategy may help mitigate some of the risks.

Interested in more high-tech stocks? Check out our curated list of high performing growth companies.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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