Disney or Netflix: Who Will Win the Streaming Wars?

The streaming landscape in the United States is heating up with rising competition as pure-play media companies are also launching their direct-to-consumer services. This popularity of streaming services has been fueled by a rising number of users cutting the cord on pay-TV and opting to view content from anywhere, anytime on different devices.

According to a report from Mordor Intelligence, the over-the-top (OTT) market in the United States is expected to grow at a Compounded Annual Growth Rate (CAGR) of 11.22% in terms of revenues and around 2.3% in terms of subscribers between 2021 and 2026.

Using the TipRanks stock comparison tool, let us compare two top media stocks, Netflix and Disney, and look at what Wall Street analysts are saying about these stocks.

The Walt Disney Company (NYSE: DIS)

Shares of Disney have seen a sell-off in the past month as shares have dropped 8.8%. Investor concerns for the stock have ranged from a possible slowdown in Disney+ subscribers to whether its Theme Parks business will recover.

Disney is expected to announce its Fiscal Q1 FY22 results on February 9.

Let's examine some of these concerns in detail. In Q4, Disney’s direct-to-consumer (DTC) business saw its operating loss widening to $0.6 billion from $0.4 billion in the same period last year. The widening operating loss was driven by higher operating losses at Disney+ and ESPN+.

However, the company’s management did state on its Q4 earnings call that it anticipates Disney+ to reach its “peak year of losses in fiscal 2022 instead of in fiscal 2021 as better-than-expected revenue and lower content expenses due to production delays contributed to lower-than-expected losses in 2021.”

But Disney does expect to ramp up its content expense and has projected it to range between $8 billion and $9 billion in FY24, with an emphasis on more local and regional content.

Will this rise in content costs translate to an increase in subscribers? While Disney’s management has cautioned that it does not expect Disney+ subscribers to grow linearly from quarter to quarter, it is optimistic that Disney+ subscriber net additions in H2 of FY22 will be “meaningfully higher than the first half of the year.”

Disney is targeting achieving subscriber numbers ranging from 230 million to 260 million by FY24. In a bid to expand its subscriber base, this year, the company plans to bring Disney+ to more than 50 countries, including countries in Central Eastern Europe, the Middle East, and South Africa. Disney aims to make Disney+ available in more than 160 countries by FY23.

In view of these factors, it is evident that Disney is bullish on the streaming landscape and on its streaming service, Disney+.

Guggenheim analyst Michael Morris expects Disney+ to have subscriber net additions of 10 million in fiscal Q1, ahead of consensus expectations of 6.8 million subscriber net additions. The analyst added that Disney’s projection of programming costs to rise to $8 billion for FY22 “feels underappreciated in a consensus outlook that expects the DTC [direct-to-consumer] business to approach breakeven by fiscal 2023.”

However, the analyst downgraded the stock from a Buy to a Hold and lowered the price target from $205 to $165 (15.4% upside) on the stock.

This is due to Disney's Theme Parks business. While Morris is upbeat about Disney’s Parks business over the long term, he believes that a “slower return of international visitation and inflationary pressures beyond the control of management are not fully reflected in consensus expectations.” He is also concerned about the rising costs of salaries for theme park staff.

The rest of the analysts on the Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 14 Buys and 7 Holds. The average Disney stock prediction of $194.05 implies upside potential of approximately 35.7% to current levels for this stock.

Netflix (NASDAQ: NFLX)

Shares of Netflix have tanked 28.5% in the past month, as investors have given a thumbs-down to the streaming service’s Q4 results. There are clear signs that the growth of the streaming service is slowing down. Even as Netflix’s revenues grew 16% year-over-year to $7.7 billion, this growth rate was still lower versus growth of 21.5% in the same period last year.

Netflix expects this rise in revenues to decelerate further in Fiscal Q1, with a year-over-year increase of only 10.3% and revenues of $7.9 billion.

Moreover, the company’s streaming paid memberships globally are increasing at a slower rate. At the end of Q4, NFLX had global memberships of 221.8 million, a rise of 8.9% year-over-year. In the same period a year back, the company’s memberships had grown at a strong rate of 21.9% year-over-year.

In Fiscal Q1, Netflix’s streaming memberships are projected to be 224.3 million, an increase of 8% year-over-year.

Even as Netflix’s membership rate of increase seems to be slowing down, the company continues to pump in money on content. This is also reflected in the company’s free cash flow, which more than doubled in Q4 FY21 to $569 million, from $284 million in the same period a year ago.

However, Netflix estimates content spend of around $18 billion in FY22 and this seems to be “meaningfully muted," according to Rosenblatt Securities analyst Mark Zgutowicz. The analyst suspects that the company’s “management is curtailing TV/movie content spend to align a weak sub [subscriber] acquisition market.”

According to Zgutowicz, Netflix “is a victim of its own success.” The analyst thinks that NFLX is “getting the media squeeze play” as the streaming incumbent faces rising competition, and viewers prefer short videos over long videos.

Moreover, according to the analyst, NFLX is also competing for eyeballs as viewers are spending more time on other media, including mobile or console gaming and podcasting.

As a result, Zgutowicz remained sidelined on the stock with a Hold rating but lowered the price target from $450 to $400 on the stock.

Other analysts on the Street are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 18 Buys, 15 Holds, and 3 Sells. The average Netflix stock prediction of $521.21 implies upside potential of approximately 22% to current levels for this stock.

Bottom Line

While analysts are cautiously optimistic about both stocks, based on the upside potential over the next 12 months, Disney seems to be a better Buy.

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