Disney VS Netflix

Their market cap is not that dissimilar, but one has a PE ratio of 154 the other around 16, but what should investors make of Disney and Netflix?

Article updated: 4 September 2018 at 9:00am Author: Michael Baxter

Can Disney be more like Netflix?

Netflix, a company founded in 1997, has one big advantage over Disney, founded in 1923. The company behind Mickey Mouse, and now Star Wars and the Marvel franchise, is playing catchup in the market everyone wants to dominate.

In September, 52 original series and movies are debuting on Netflix. The company has around 100 million users. And yet when Disney talks about competing in the streaming business, its boss Bob Iger says: “we’re going to walk before we run.”

I am a fan of Disney, I love the way Iger has turned the company around during his tenure. Back in the early noughties, under the leadership of Michael Eisner, Disney was in a sorry state, and had become reliant on its relationship with Pixar, when the Pixar boss, Steve Jobs, and Eisner himself seemed to hate to be in the same room together. Shares are up more than seven-fold since those days.

Well done Iger. He has been boss since 2005 and what a fine period it has been for the share price, and the company has been transformed.

Yet, in some ways, the company was caught sleeping at the wheel, a victim of innovators dilemma, perhaps. It owns all these incredible assets, has this amazing brand name, but if failed to spot the opportunity that was staring at it.

The rise of Netflix per se may have been hard to predict, but the rise of the Netflix style streaming services was not.

Disney should have been competing in this arena far sooner. That has been its biggest mistake.

Now it is trying to take Netflix and indeed Amazon Prime, head on. But the streaming business is beginning to look exciting. Apple is reportedly moving in, among other things turning my favourite science fiction books, Asimov’s Foundation series, into a TV show. Amazon is reportedly investing over a $1 billion in a Lord of Rings TV series.

As far as streaming is concerned, show business is big business, it is not quite like: ‘no other business I know’, but it is one of the most exciting industries around, right now.

Investing with The Share Centre

You can buy shares in Disney, Netflix and indeed most US companies via The Share Centre. Complete a W-8BEN form (valid for three years) and speak to the Dealing Team for further information.

Disney results:

There does seem to be something of a mismatch between Disney shares and the results. 
In the latest quarter, revenue and net income was up seven per cent, and in nine months to July 30 2018, revenue was up seven per cent, net income was up 42 per cent to $10,276 million.

Look back further and the story looks like this.

Slide to view more
Revenue in $ million 42,278 45,041 58,813 52,465 55,632 55,137
Net income in $ million 6,173 6,636 8,004 8,852 9,790 9,366

Source: Macrotrends

What we can say is that in the last nine months, net income was more than ten per cent higher than its net income in the whole of the previous year.

Playing catch-up

Disney is trying to catch-up with Netflix at a cost: it is buying up most of the 21st Century Fox assets. And should, ultimately, become the owner of Sky too, assuming the 21st Century Fox purchase of Sky goes ahead.

A Sky/21st Century Fox/Disney combination would be formidable – combining such assets as Avatar and Planet of the Apes, with Star Wars and Disney’s more traditional brands.

Comcast remains a potential cloud on the horizon? – because while it has pulled out of the battle to own Fox, it is still in the running to take a big slice in Sky.

The shares

Shares in Disney have been fairly flat over the last four years, with the share price as I write, a little lower than at around this stage back in 2015, but then shares have doubled in the last five years.

The best word to describe growth in Netflix shares might be ‘extraordinary’. Shares have roughly doubled in the last year and are up around ten-fold in the last ten years.

The number of subscribers to their streaming service was around 10 million back in 2008.

Room for more than one winner

But if you are interested in the video steaming business, I am not sure you need to choose between Disney and Netflix. There seems to be room in the business for several players – it’s not like social media, for example, which creates natural monopolies.

My biggest doubt is that Netflix itself has seen a bubble-like ride – the shares trajectory has been racing upwards for an awfully long time, the PE ratio is always so high.

Yet, with one hundred million users, it would not take much to see profits rise significantly, justifying the current PE.

Investing with The Share Centre

You can buy shares in Disney, Netflix and indeed most US companies via The Share Centre. Complete a W-8BEN form (valid for three years) and speak to the Dealing Team for further information.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.