FuboTV (NYSE: FUBO) in the spotlight after its shares surged as much as 38% in a single week. But the streaming company continues to lose money, with analyst consensus estimates predicting even greater losses through 2025.
This is why Netflix (NASDAQ: NFLX) And Walt Disney (NYSE: DIS) stand out as the best bargains in the streaming industry.
Netflix is hugely popular for good reasons
Netflix is now worth almost twice as much as Disney, but it wasn’t always that way.
Netflix first surpassed Disney in market cap in 2018. But investor optimism following the launch of Disney+ helped Disney regain the lead in 2021. Netflix fell below $100 billion in market cap in early 2022 amid a broad selloff in growth stocks and has since tripled from that low.
Netflix’s business model has changed considerably over the years. It started by shipping DVDs, then moved on to licensing and digitizing third-party content, and finally began producing its own content to expand its intellectual property.
Producing content in-house gives Netflix more control, but it also puts a lot of pressure on Netflix to have hit shows, keep subscribers engaged, and justify price increases. If there are too many flops, customers may leave the platform.
Netflix hasn’t always had a winning formula. But it has learned from its mistakes and found a solid balance between producing its own content, licensing content, and integrated advertising options so that users can choose a cheaper plan. Netflix has successfully tackled password sharing, which has helped increase subscriptions.
Netflix’s operating margin is at an all-time high as revenue has grown faster than operating expenses. Over the past five years, revenue has grown 92.3% while operating expenses have grown 51.2%, bringing its operating margin to an impressive 23.8%. For comparison, Netflix’s operating margin was less than 10% before the pandemic.
Netflix is at its best, but the enthusiasm is reflected in the stock price, which is hovering near an all-time high. Netflix recently had a forward price-to-earnings (P/E) ratio of 36.4, which certainly isn’t cheap. However, it’s a top-tier growth stock that could be worth its premium price if you have the risk appetite to ride out the volatility.
Disney is on the road to success and the stock is cheap
While Netflix has done a great job of refining its business model and disrupting traditional media over the years, Disney has faced the difficult task of tapping into new ideas without completely destroying its existing businesses.
The launch of Disney+ in November 2019 was a major step forward and showed that Disney was willing to take medium-term losses in the pursuit of creating something that would last.
Disney has long relied on blockbuster movies and its library of classic films that are beloved by audiences around the world. But when Disney+ subscribers can watch a movie for free months after it hits theaters, there’s less incentive to go to the theater — especially given the quality of home streaming services today.
Under pressure to make every theatrical release a smash hit, Disney has been criticized for producing content to make a profit and offset losses on Disney+. The same goes for its parks business, which has increased the prices of tickets, concessions and merchandising, providing a prime example of the impact of inflation on consumers.
While Disney+ ultimately turned a profit a quarter earlier than expected, it still hasn’t figured out the perfect plan for how much to spend on pure Disney+ content or theatrical releases. As a result, its content offerings rely heavily on sequels and successful franchises like Marvel, Star Wars, Toy Storyetc.
There’s also the matter of succession planning. Bob Iger served as Disney’s CEO from 2005 to 2020, returning in 2022 to replace Bob Chapek, whom he handpicked to lead the company. Iger has made it clear that his stay is temporary and wants to make sure the next CEO is the right fit. But that’s a big question mark for a company with a history of management shakeups, including a potential hostile takeover that was barely stopped when Michael Eisner and Frank Wells restored order to a struggling Disney in the early 1980s.
Just as the market rewarded Netflix for executing on many important goals, it has punished Disney for all the uncertainty. The stock is just 15% below a 10-year low and 55% off its all-time high.
With a forward P/E ratio of just 18.4, Disney could be more attractive to value-oriented investors. This long-term component of the Dow Jones Industrial Average also reinstated the semi-annual dividend — although it now yields just 1%. However, investors can expect Disney to increase the dividend if business improves.
Disney could benefit from a surge in consumer spending as interest rates are expected to fall. In the long run, Disney has several ways to monetize its wealth of content, including through movie theaters, streaming, cruises, performing arts and in-person experiences at the parks. This could be a good time for investors who believe in Disney’s turnaround to buy the stock while it’s in the bargain bin.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Walt Disney and holds the following options: short September 2024 $95 calls on Walt Disney. The Motley Fool has positions in and recommends Amazon, Netflix, Walt Disney, and fuboTV. The Motley Fool has a disclosure policy.
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