Netflix or Disney: Which Media Stock Is A More Compelling Pick?
The pandemic has had a very mixed impact on companies in the entertainment industry. On the one hand, theater chains and theme parks booked huge losses as they were shuttered by the pandemic, and on the other, streaming services and gaming companies experienced sharp subscription growth as they kept people stuck at home entertained.
Some analysts are concerned about the slowdown in the subscription rates of streaming companies following the reopening of the economy, while others are focusing on players with a strong long-term growth story. Against an uncertain demand backdrop, we will use TipRanks’ Stock Comparison tool to pit streaming king Netflix against media giant Disney to see which stock offers a more compelling investment opportunity.
Netflix (NFLX)
With its first-mover advantage in streaming services, Netflix has been a major beneficiary of the cord-cutting phenomena over recent years and especially during the pandemic. However, as the company anticipated, the subscription growth rate decelerated in the third quarter due to the easing of lockdown restrictions.
Netflix ended 3Q with 195.2 paid memberships, up 23.3% year-over-year. However, paid net additions in 3Q came in at 2.2 million, reflecting a major drop compared to 10.1 million in 2Q and 15.8 million in 1Q. For 4Q, the company expects paid net additions of 6 million, compared to 8.8 million in the prior-year fourth quarter.
What concerns investors now is the force with which competition (like Disney+, AT&T’s HBO Max, Comcast’s Peacock and Amazon Prime Video) is coming for Netflix’s market share. Additionally, they are worried about the impact of the company’s latest price increases on subscriptions, especially amid streaming wars.
Despite the recent price hike and 3Q slowdown, J.P. Morgan analyst Doug Anmuth continues to be positive about Netflix and reiterated his Buy rating last month while boosting the stock price target to $628 from $615. The 5-star analyst noted that "while each successive price increase should generally feel a bit more friction," he does not expect this price hike to pressure net subscriber additions much, as Netflix’s basic plan remains unchanged at $8.99 and it’s the basic plan subscribers who are more price sensitive.
As for the impact on the other plans, Anmuth believes that the price increases come during a period of stronger content, colder weather and renewed pandemic restrictions in the U.S., all of which will likely extend into the first quarter of 2021. "Those factors should help offset the impact of higher pricing," added the analyst.
"We expect NFLX to continue to benefit from the global proliferation of Internet-connected devices and increasing consumer preference for on-demand video consumption over the Internet, with NFLX approaching 300M global paid subs by 2024," summed up Anmuth.
Meanwhile, Netflix has its eyes on the opportunities in international markets. The Asia-Pacific region alone accounted for 46% of its paid net subscription additions in 3Q. The company achieved double-digit penetration of broadband homes in both South Korea and Japan and aims to replicate this success in India and other countries. (See NFLX stock analysis on TipRanks)
Netflix’s original content continues to be its key growth driver, especially when the competition is grabbing popular licensed content—a recent example being the company losing the highly-rated series “The Office” to Comcast. It continues to invest heavily in original content production to keep the viewers hooked on its streaming services.
Currently, Netflix scores a Moderate Buy analyst consensus that breaks down into 21 Buys, 5 Holds and 3 Sells. With shares rising 59.5% year-to-date, the Street sees upside potential of 12.6% in the months ahead with a price target of $580.62.
Walt Disney (DIS)
The current health crisis wreaked havoc on Disney’s parks, studio, and cruise line businesses, as reflected by the 23% fall in the company’s fiscal 4Q revenue (ended Oct. 3). However, that’s not what is grabbing the market’s attention. It is the blockbuster growth in the media conglomerate’s streaming service Disney+.
When Disney+ was launched in November 2019, the company expected it to gain 60-90 million subscribers by 2024. Thanks to pandemic-induced demand, Disney+ won 73.7 million paid subscribers within the first year. Since its launch, the company has rolled out Disney+ in over 20 countries worldwide and recently extended the service to Latin America.
Disney intends to expand the presence of Disney+ to additional overseas markets in the coming year. The company is now gearing up to launch Star, a new general entertainment streaming service, across the globe in 2021. (See DIS stock analysis on TipRanks)
In light of the success of Disney+, the company announced a reorganization of its media and entertainment businesses in October, with the new structure designed to accelerate the growth of the direct-to-consumer business (includes Disney + / Disney+Hotstar, ESPN+ and Hulu).
Tigress Financial analyst Ivan Feinseth reiterated a Buy rating on Disney recently and stated, “Disney+ continues to be a powerful force against the COVID-19 pandemic headwind. Gains in Disney+ subscribers, along with strong broadcast network results and strategic cost savings, help DIS overcome the negative impact that the pandemic has had on its parks, studio, and cruise line businesses.”
Emphasizing his optimism, Feinseth added, “Eventually, we will overcome the pandemic, and DIS will be in an even better position to take advantage of increasing consumer demand for new movies, park attendance, cruises, and merchandise driven by its leadership position and strong brand equity.”
Ahead of Disney’s Investor Day, the Street has a Strong Buy analyst consensus on the stock, based on 15 Buys and 4 Holds. That said, the average price target of $155.18 indicates a modest upside potential of 1% from current levels. Shares have risen 6.2% so far in 2020.
Conclusion
Disney’s focus on its direct-to-consumer business, mainly Disney+, a diversified business model and its strong brand equity back the Street's bullish outlook on the House of Mouse. However, if you are looking for stock gains in the near-term, then the upside potential in Netflix makes it a better pick.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment