The rising demand for captivating content on OTT platforms, integration of advanced technologies to improve video quality and device flexibility, and flexible subscription plans should benefit streaming giants Netflix (NFLX) and Walt Disney (DIS). But which of these stocks is a better buy now? Read more to find out….
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Netflix, Inc. (NFLX) and The Walt Disney Company (DIS) are renowned companies operating in the streaming services industry. NFLX is a popular online streaming entertainment service provider, offering TV series, documentaries, and feature films across various genres and languages. It acquires, licenses, and produces content, including original programming.
On the other hand, DIS engages in film and episodic production and distribution activities and operates television broadcast networks, studios producing motion pictures, and D2C streaming services. It sells branded merchandise through retail, online, and wholesale businesses and develops and publishes books, comics, and magazines.
Rising demand for in-home entertainment helped over-the-top (OTT) streaming service providers benefit by expanding their customer bases, introducing innovative and captivating content, and offering flexible subscription plans since the onset of the pandemic.
Moreover, the integration of cloud-based solutions, blockchain technology, and AI/ML to improve video quality and customer experience should allow the streaming industry to grow. The global video streaming market is expected to grow at a 19.9% CAGR to reach $1.69 trillion by 2029.
While DIS lost 3.4% over the past month, NFLX declined 3.1%. But which of the stocks is a better buy now? Let’s find out.
Recent Financial Results
For the fiscal 2022 first quarter ended March 31, 2022, NFLX’s revenues increased 9.8% year-over-year to $7.87 billion. The company’s operating income came in at $1.97 billion for the quarter, indicating a marginal rise from the prior-year period.
While its net income decreased 6.4% year-over-year to $1.60 billion, its EPS fell 5.9% to $3.53. The company had cash and cash equivalents of $6.01 billion as of March 31, 2022.
For its fiscal 2022 second quarter ended April 2, 2022, DIS’ revenues increased 23.3% year-over-year to $19.25 billion. The company’s income from continuing operations came in at $1.10 billion, up 10.4% from the year-ago period.
Its net income came in at $470 million, representing a 47.8% rise from the prior-year period. Its EPS came in at $0.26, indicating a 46.9% year-over-year improvement. As of April 2, 2022, the company had $13.27 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, NFLX’s EPS, total assets, and levered free cash flow have increased at CAGRs of 57.9%, 18.5%, and 5%, respectively.
Analysts expect NFLX’s EPS to decline 3.6% in fiscal 2022, ending December 31, 2022, and rise 8.8% in fiscal 2023. The company’s revenue is expected to grow 9% year-over-year in fiscal 2022 and 8.8% in fiscal 2023. Its EPS is expected to grow at 11.7% per annum over the next five years.
Over the past three years, DIS’ EPS, total assets, and levered free cash flow have decreased at CAGRs of 45.1%, 1.9%, and 4.9%, respectively.
DIS’ EPS is expected to increase 92.1% year-over-year in fiscal 2022, ending September 30, 2022, and 38.4% in fiscal 2023. The company’s revenue is expected to grow 39.5% year-over-year in fiscal 2022 and 12% in fiscal 2023. Its EPS is expected to grow at a 40.9% rate per annum over the next five years.
Valuation
In terms of forward EV/EBITDA, DIS is currently trading at 15.29x, 14.5% higher than NFLX’s 13.36x. In terms of non-GAAP forward P/E, NFLX’s 16.34x compares with DIS’ 23.44x.
Profitability
DIS’ trailing-12-month revenue is 2.5 times that of NFLX’s. However, NFLX is more profitable, with a 41.6% gross profit margin versus DIS’ 33.8%.
Furthermore, NFLX’s ROE, ROA, and ROTC of 32.9%, 9.1%, and 11.9% compare with DIS’ 3.1%, 1.8%, and 2.3%, respectively.
POWR Ratings
While NFLX has an overall C grade, which translates to Neutral Buy in our proprietary POWR Ratings system, DIS has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
NFLX has been graded a B for Quality, consistent with its higher-than-industry profitability ratios. NFLX’s 32.9% trailing-12-month ROE is 510.7% higher than the 5.4% industry average.
DIS’ D grade for Quality is in sync with its lower-than-industry profit margins. DIS has a 3.1% trailing-12-month ROE, which is 43% lower than the 5.4% industry average.
NFLX has a C grade for Value, in sync with its slightly higher-than-industry valuation ratios. NFLX’s 16.34x non-GAAP forward P/E is 0.4% higher than the 16.27x industry average. DIS’s D grade for Value is in sync with its overvaluations. DIS’ 23.44x non-GAAP forward P/E is 44.1% higher than the 16.27x industry average.
Of the 66 stocks in the F-rated Internet industry, NFLX is ranked #17.
DIS is ranked #13 of 19 stocks in the F-rated Entertainment – Media Producers industry.
Beyond what we have stated above, our POWR Ratings system has graded NFLX and DIS for Stability, Growth, Sentiment, and Momentum. Get all NFLX ratings here. Also, click here to see the additional POWR Ratings for DIS.
The Winner
The release of new content on DIS’ OTT streaming service platform Disney+ has been attracting massive viewership, but the impact of high inflation and recessionary concerns on DIS’ Parks, Experiences, and Products segment has been affecting the company’s financials.
On the other hand, the unexpected decline in subscriptions during the first quarter is still weighing heavily on NFLX.
Considering the weak growth prospects of NFLX and DIS, their current valuations do not look reasonable. Therefore, none of these two stocks appear to be good investments. However, given NFLX’s relatively lower valuation and higher profitability, it could be wise to wait for a better entry point in the stock.
Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Internet industry, and here for those in the Entertainment – Media Producers industry.
NFLX shares were trading at $174.54 per share on Tuesday afternoon, down $2.80 (-1.58%). Year-to-date, NFLX has declined -71.03%, versus a -19.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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