What a difference a pandemic makes…

I last compared Disney (DIS) to Netflix (NFLX) a full year ago, just a few short weeks before the very successful launch of Disney+ followed by a 100-year pandemic. The purpose of this series has always been to determine which of the two companies provides the best long-term upside, so let’s revisit them now that a pandemic rages globally.

With its diversified, vertically-integrated empire of entertainment including theme parks, cruiselines, hotels, and movies, Disney (DIS) seemed to be the safer long-term investment when compared to Netflix’s (NFLX) online-only, single-product streaming service.

And then, as if straight from a blockbuster movie, the perfect storm of a pandemic and global recession leveled Disney’s in-person experiences while simultaneously elevating Netflix’s stay-at-home, sanity-saving streaming product.

How have the two stocks performed in the past year?

Disney’s stock is $127.36, down -2.70%

Netflix’s stock is $541.94, up +96.85%

Over the last year, Netflix has gained an astounding $113.56 billion in market capital, effectively making it a larger company by market cap over Disney which lost -$6.72B thanks to the pandemic shutdown.. 

Netflix saw an increase of $2.80 per share on its Earnings Per Share (EPS), helping substantiate its stock price with a Price to Earnings Ratio (P/E) relatively unchanged, up +1.42 from last October. Disney, on the other hand currently has a negative EPS, bleeding money thanks to closed theme parks and entertainment experiences. Accordingly, Disney has no P/E ratio due to, well, not having any Earnings (anything divided by zero is zero).

Netflix is the clear victor to Disney in 2020, but we now have to ask is there still upside left in Netflix and can Disney recover from its COVID crash?

Disney – No more dividend?

Earlier in October 2020, Third Point Capital, headed by famous activist investor Dan Loeb, bought shares of Disney and advised the company to eliminate its dividend permanently (Source: CNBC). Disney management had wisely decided to suspend its dividend back in Q1 2020 when COVID-19 forced the company to shut down its theme parks, hotels, cruise lines, and postpone major blockbusters.

The semi-annual dividend, which costs Disney billions of dollars each year, could be used to increase content production and put Disney in a more fighting stance against Netflix, Viacom’s HBO Max, NBC’s Peacock, and the myriad of other streaming services vying for streaming-consumers hard-earned dollars.

As of writing this piece, Disney CEO Robert Chapek acknowledged that the company would invest in its future with significantly more funds, but did not say one way or the other whether the company would cut or eliminate its long-running dividend payouts.

Disney – Reorganizing a media giant

Almost as if the company knew its annual anniversary on Get Irked was coming up this weekend, Disney announced it would reorganize its media and entertainment businesses to focus on streaming, reported CNBC last Monday, October 12, 2020. 

CEO Chapek announced that the company would prioritize content creation and distribution over its other arms of in-person entertainment. The reorganization would result in a Disney more capable of taking on Netflix and similar competitors with the in-person entertainment existing as an investment “kicker” once a vaccine against COVID-19 became available and economies reopen.

This led many analysts to suggest that Disney has become cheap as an investment when compared to Netflix. However, with a significant amount of debt on its balance sheet since buying 20th Century Fox’s Intellectual Property in 2019, can Disney hold on long enough to see revenue generation from its reorganization?

Is Netflix a necessity… at a higher price?

Netflix proved throughout to the pandemic that consumers love its service with increasing revenue and subscriber numbers each quarter. With the stock nearly double where it was a year ago, and subscriber growth slowing, many analysts believe Reed Hastings may be planning another subscription price hike to maintain growth, potentially adding $2-4 per subscription bringing the popular $15.95/mo. subscription to $17.95 or $19.95 a month.

While Netflix has been able to push through price hikes in the past, there have never been as many competitors dotting the streaming landscape as there are now. Given that even Netflix’s production studios have shut down during the pandemic, does Netflix provide enough value at a price nearing $20 a month? Conversely, without the price hike, can Netflix continue to grow at a rate to make it worth its sky-high valuation?

Disney vs. Netflix – Valuations?

Valuations have obviously changed dramatically since last year. While Disney has seen its stock price remain shockingly stable given the news events (I would have expected a significant drop to its current share price), Netflix has seen its stock price skyrocket as its streaming service became a mainstay during the stay-at-home closures.

However, now that Disney is refocusing its mighty energies on streaming, what would Disney’s stock price look like if it was valued like its competitor, Netflix?

If Disney had Netflix’s valuation, its stock would be $696.42 per share

Assuming Disney’s Earnings-Per-Share (EPS) from a year ago of $7.77 and Netflix’s current 89.63 P/E ratio, Disney’s stock would be valued be $696.42 if it received Netflix’s valuation, a nearly 450% increase from Disney’s October 2020 share price.

However,  as I’ve said before, if Netflix and Disney both received a traditional growth company’s PE ratio of 25-30, the two companies’ prospects are very different. With a P/E of a typical high-growth company, the two stocks’ price targets would look like this:

Disney’s Target Range: $194.25 to $233.10

Netflix’s Target Range: $148.00 to $177.60

While Netflix’s target range is much higher than last year’s range of $78.00-$93.60 thanks to its increased earning strength due to the pandemic, the stock would still drop more than –70% from its Friday, October 16 close to make it into the range of a typical growth P/E ratio whereas Disney would see price appreciation of +52.5% from Friday’s close.

The Versus Verdict Is…

 While it’s clear that Netflix is here to stay, does it have the same growth coming in the future compared to Disney, a relative newcomer to streaming and an expert content producer with a much lower valuation on basically the same product?

While it hasn’t been easy hanging on to Disney’s stock while watching Netflix exceed all expectations over the past year, it’s hard to deny that out of the two, Disney has much better long-term prospects for growth as it grows into a valuation more comparable with Netflix’s P/E ratio.

So, once again, the better long-term investment appears to be Disney, however, no one can count Netflix out as it continues to confound all expectations. Will Disney grow exponentially from here? Will Netflix continue to skyrocket higher?
 

Stay tuned for Episode 4 to find out!