This feature story is the second in a series.

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Disney vs. Netflix – Six Months Later…

Six months ago, I analyzed Disney (DIS) and Netflix (NFLX) stock following Disney’s announcement of its streaming service scheduled to launch in November 2019. When looking at their then-current standings and future prospects, I suggested that Disney would be the better long-term investment.

Now that time has passed along with two Netflix earnings reports, several award shows, and a number of streaming news announcements, how have the two media entertainment giants fared?

Disney’s stock is $130.89, up +0.64%

Netflix’s stock is $275.30, down -21.60%

Since April, Netflix has lost a mind-blowing $32.7 billion in market capital where Disney gained an additional $2.07 billion.

Both Disney and Netflix saw increases to their Earnings Per Share (EPS) – a positive as more EPS equates to more revenue – with almost identical increases with Disney at +0.47 EPS and Netflix at +0.44 EPS.

Both saw a decrease in Price to Earnings Ratios (PE Ratios) which is a positive in terms of valuation with a lower number meaning a more fairly-priced stock and a higher number meaning a more expensive stock.

Disney’s PE Ratio dropped by about -5.39% or 0.96 which is impressive given the stock price remained relatively unchanged. This indicates that Disney is growing into its new valuation.

Netflix’s PE Ratio dropped by -32.67% or 42.81 due entirely to the drop in its stock price, not a good indication. Worse still, if you think that this new PE Ratio makes Netflix fairly valued, think again; Netflix’s new PE Ratio is still more than five times more expensive than Disney.

Where Do They Go From Here?

We can see how the two giants have handled 2019, but what’s next for Disney and Netflix. Is Disney still the preferred long-term investment or has Netflix been humbled enough to be considered as a position in a portfolio?

“Tough Competition.” – Reid Hastings, CEO

As if Netflix wasn’t having a challenging enough time with all the new competition entering the space, CEO Reid Hastings actually acknowledged the challenge by admitting seeing “tough competition” on its way with a “whole new world starting in November” according to CNBC on September 20, 2019.

And he wasn’t kidding… Disney Plus, Apple TV Plus, NBC, HBO Max, and more have their entries to the space coming soon.

Netflix’s Earnings Say….

Netflix gave its third-quarter earnings report just a few short days ago on Wednesday, October 16, 2019 (the timing of this episode of Versus is not accidental). Here’s what Big Red “N” had to say:

Netflix beat the lowered estimates carried by the street for its Q3 earnings report and popped more than 9% in after-hours trading. However, during the video conference call, CEO Reid Hastings acknowledged the challenges facing Netflix in the form of competing streaming services and pointed to its past record overcoming competitors.

While a 9% pop might sound great, it’s worth noting that since the first episode of Versus in April, Netflix plummeted to $252.28 a drop of -28.15% in just six months, so the 9% bump only got Netflix up to $312, still down more than -11% lower than where it was in April.

Then, the following day (Thursday, October 17, 2019), the reality of the conference call really set in, reported CNBC. In addition to extraordinary content costs , Netflix leadership lowered their guidance for the next quarter and pointed to 2020 as a challenging year. In addition, the company has seen slowing subscriber growth, particularly internationally where its growth had been strong.

While some professional analysts and traders on CNBC remarked that they believed Netflix might pop, not one suggested Netflix as a long-term investment, preferring to take advantage of potential upside as a short-term trade.

Does Netflix still have Pricing Power?

Since the first Get Irked Versus, Apple announced that its new streaming service, Apple Plus (why are they all called “Plus?”) would only cost $4.99/mo. and all new devices would include a free year as a promotion. Disney’s $7.99/mo. regular pricing also featured a promotional offer of less than $4/mo. if three years were purchased in advance.

Both services offering such affordable monthly fees certainly puts a crimp in Netflix’s nearly $15/mo. fee for more than one screen at a time (which pretty much any household of more than one person needs).

I still think Netflix offers interesting programming, but with services available for half or even a third of Netflix’s monthly fee (both Disney Plus and Apple Plus offer multiple-screen streaming at their rates), is Netflix’s content so good that it deserves a premium?

Is Netflix still Award-Winning?

During this year’s Emmy Awards, Netflix won fewer Emmys than both Amazon (AMZN) and HBO (owned by AT&T/Time Warner (T)), reported the L.A. Times.

In a world where everyone has their own streaming service, “must-watch” television is the only appeal. Awards are a key way for services to distinguish themselves and Netflix has fallen far behind its streaming competitors.

Can Netflix afford its Back Catalog?

Original content can only command so much as demonstrated by Apple’s (AAPL) knowingly-low $4.99/mo. price. Apple realized it can only offer a small handful of shows so in order to drum up interest, it has to attract viewers with a lower rate.

In order to command its higher subscription fee, Netflix will need to maintain a back catalog to keep viewers entertained while waiting for the release of new original content, and that back catalog is no longer as cheap as it used to be.

With every studio opening its own streaming service (even NBC’s is coming in 2020), Netflix will only continue to lose Back Catalog offerings unless it’s willing to pay up, and pay up it will as demonstrated when Netflix paid $500 million for the rights to stream ‘Seinfeld’ only to be shown up by HBO which paid $1 billion for ‘The Big Bang Theory’ after shelling out $425 million for ‘Friends,’ according to The Washington Post.

If Netflix continues to spend hundreds of millions of dollars just for a single series here and there, how will the company ever reach profitability?

The Market Frowns on Spending Now

Six months ago, the stock market was still willing to buy growth at any price. That was until the Initial Public Offerings (IPOs) that drowned the market in useless stock.

Stinkers ranging from Uber (UBER) and Lyft (LYFT) to Smile Direct Club (SDC) and Peloton (PTON) have scared investors away from not just the new growth names, but the old ones, too, as Netflix’s stock price shows.

The cycle has changed. Investors no longer want growth at any price, they want profits, something Netflix hasn’t been able to demonstrate in its entire existence. Without being able to draw in new investors and without making profits, how much runway does Netflix have left before it runs out of money and has to stop spending money on content to survive?

Will the subscribers stick around with what little content Netflix will still offer at that point?

Disney vs. Netflix – Valuations?

Even though Netflix’s valuation has decreased substantially in the past six months, it’s still painfully overvalued in comparison with Disney.

Once again, to be clear, I don’t think Netflix will go out of business. I think the valuation of Netflix will converge with Disney’s until they’re valued at the same rate. To repeat what I said in the last issue of VersusNetflix is trying to be Disney, not the other way around.

Even if every household subscribes to multiple streaming services – including Netflix as one of them – why is Netflix valued as if it’s going to be the only one in the space? Shouldn’t Netflix’s stock be valued using the same metrics valuing HBO, Disney, and the other content providers?

The argument used to be “Netflix is special,” however, that’s no longer the case. Netflix will survive, but it may not thrive and even if it does survive and it does thrive, it’s not going to be the only one in the space… far from it, in fact.

What would Netflix’s stock price look like if it was valued like its competitor, Disney?

If Netflix had Disney’s valuation, its stock would be $52.60 per share

With Disney currently holding a Price-to-Earnings Ratio (PE Ratio) of 16.85 and Netflix’s Earnings-Per-Share (EPS) at $3.12, Netflix’s stock would be $52.60 if it were valued like Disney, an -80% discount from October 2019 prices.

If Disney had Netflix’s valuation, its stock would be $685.39 per share

With Netflix’s current 88.21 PE ratio and Disney’s EPS of $7.77, Disney’s stock should be valued be $685.39 if it received Netflix’s valuation, a 424% increase from October 2019 prices.

As I said last time, I think that Netflix and Disney both deserve a traditional growth company’s PE ratio of 25-30, not that Disney deserves Netflix’s ridiculous valuation. With a more traditional and less nose-bleed growth-type PE ratio, what would the price targets be for these two companies? 

Disney’s Target Range: $194.25 to $233.10

Netflix’s Target Range: $78.00 to $93.60

Once again, a traditional growth PE ratio range looks great for Disney (DIS) stock with a gain of at least nearly 50% from current levels, but that same PE ratio definitely makes Netflix (NFLX) stock look more than a little treacherous. Without a substantial increase in Earnings Per Share, Netflix would see a drop of at least –65% in its stock from October 2019 prices!

The Versus Verdict Is…

Disney is once again my winner in the comparison between these two streaming giants. Disney’s diversification of assets featuring multiple revenue generators combined with its consistent track record and outstanding profits makes it my preferred choice as a long-term investment.

With Netflix’s sky-high valuation and an end goal that doesn’t differentiate itself from the many, many others in the streaming space, I cannot come up with any reasonable future forecast that justifies Netflix’s current mind-blowingly excessive PE Ratio and incredibly overinflated stock price, even with its six-month haircut.

Will Netflix continue to carry its current level of valuation over the next six months as new competitors to the streaming space demonstrate that Netflix’s formula is both easy to replicate and isn’t at all unique to the Big Red “N?”

Stay tuned for Episode 3 to find out!

DISCLOSURE: Eric “Irk” Jacobson owns shares of Disney (DIS) stock and Apple (AAPL) stock. Irk is not a professional financial adviser or professional trader. All information on Get Irked is presented for educational purposes only and should not be considered professional advice or a recommendation to buy or sell a stock, only as insights into what Irk is doing. All investing and speculation carries risk and all investments can lose value. All investors should consult a professional financial adviser before entering into any investment. Invest at your own risk.

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Disclaimer: Eric "Irk" Jacobson and all other Get Irked contributors are not investment or financial advisers. All strategies, trading ideas, and other information presented comes from non-professional, amateur investors and traders sharing techniques and ideas for general information purposes.

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