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Will the Show Go on for Netflix and Disney?
Stock Analysis & Ideas

Will the Show Go on for Netflix and Disney?

While global markets are busy dealing with various challenges and geo-political uncertainties, top streaming players like Netflix and Disney are busy with furthering their subscriber penetration, capturing market share, and boosting their content and competitive prowess.

Driven by global lockdown that forced people to stay glued to their TV sets with strong OTT content, Netflix (NASDAQ: NFLX) and Walt Disney (NYSE: DIS) have gained outstanding subscriber penetration across nations over the last couple of years.

Thanks to the amplified demand for internet-connected devices across the world, the global total addressable market (TAM) opportunity still leaves ample room for increased penetration in the coming years.

Netflix has already made an impressive head start as the pioneer in the industry. On the other hand, Disney’s content is loved all over the world, with a cult-like fan following.

Using the TipRanks stock comparison tool, we can stack Netflix up against Disney, and discuss what Wall Street analysts think about the prospects of these two entertainment giants.

Netflix

Based in the U.S., Netflix, Inc. is a global streaming service and production company that offers a variety of film and television series through distribution deals as well as its own productions. As of December 31, 2021, Netflix had over 221.8 million subscribers worldwide.

Before the COVID-19 pandemic shook the world, Netflix was trading at $380 in February 2020. In two years, it has added 55 million subscribers (33% higher) and revenue has increased 50%. Notably, despite solid subscriber and revenue growth, the stock is trading just a little higher at $390. What could be the reason? Lets take a look.

In January, Netflix reported its worse-than-expected fourth-quarter results, which fell short on both revenue and subscriber expectations.

The pandemic-driven upsurge in demand for OTT content has somewhat normalised. The stock price took a huge beating, especially after the lacklustre global net subscription members additions of 8.28 million, lagging the consensus estimate of 8.33 million and its own guidance.

J.P. Morgan analyst Doug Anmuth, however, has a contrasting stance on the stock. Anmuth believes that Netflix is bound to benefit from the “ongoing disruption of linear TV” and will achieve further global sub-penetration, given Netflix’s top-quality content, higher subscriber growth converting to higher revenues and profits in the future.

At present, NFLX has a 29%, 33% and 31% penetration rate among the 776 million global broadband subscribers, 675 million current global Pay TV subscribers, and 712 million maximum (or peak) global Pay TV subscribers, respectively.

Anmuth forecast Netflix to reach 300 million global subscribers by 2025-end. The expectations are based on an assumption of a 31% penetration of the 953 million global broadband subscribers; a 42% penetration of the 720 million global Pay TV subscribers; and a 38% penetration of the 778 million maximum global Pay TV subscribers.

Comparing the two metrics above, we can see that Netflix still has strong potential to gain higher penetration.

Region-wise, the analyst projects that underpenetrated countries like Japan, India, & South Korea within the Asia Pacific (APAC) region and few countries of Eastern & Southern Europe within Europe, Middle East, and Africa (EMEA) regions will drive the next wave of subscriber growth for Netflix.

Currently, Netflix has only a 17% penetration rate of broadband subs and a 9% penetration of max Pay TV subs in the APAC regions. In EMEA, the numbers correspond to 21% of broadband subs & 40% of max Pay TV subs.

However, Anmuth discerns that growth in emerging markets will come at the cost of lower pricing, given the price-sensitive nature of these markets. Despite the lower pricing, Netflix will still benefit from these newer markets given the huge population in India, for instance.

Meanwhile, the company will gain from improved pricing power in already mature markets driven by improved service and greater engagement.

Other analysts on Wall Street are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 18 Buys, 15 Holds, and two Sells. The average Netflix stock price target is $515.57, implying 31.69% upside potential to the current levels, at the time of writing.

Walt Disney

Walt Disney is an American multinational entertainment and media conglomerate that produces and distributes television and motion picture content. It operates theme parks, resorts, cruise lines and offers streaming services. Notably, Disney is approaching its 100th anniversary of the founding year of the company in 1923.

In February, Disney posted upbeat fiscal Q1 2022 results driven by robust DTC subscriber gains leading to revenues and profits that significantly beat analysts’ expectations.

At its recent Analyst Day held at Walt Disney World, the company highlighted its growth initiatives including several new theme park attractions and its new Genie and Genie+ guest management applications and Lightning Lane premium upgrades, all aimed at elevating guest experiences.

The above-mentioned initiatives will continue to boost its currently accelerated growth momentum as seen in the Q1 Disney+ subscriptions that increased 37% year-over-year globally to 129.8 million.

Further, the new Disney+ streaming content is boosted by the impressive performance of several recently released movies at the box office.

Tigress Financial Partners analyst Ivan Feinseth reaffirms Disney’s leadership position in the entertainment world. He stated, “Content is King, and DIS is the King of Content, which continues to drive its flywheel of growth.”

He believes that Disney offers a great return on investments and long-term profitability based on its top-notch brand equity, innovative entertainment development capabilities, and ongoing investments in new digital media development initiatives.

RBC Capital’s analyst Kutgun Maral issued a Buy rating and a price target of $210 (51.6% upside potential).

Maral remains bullish on the stock following the investor event held at Walt Disney World. He highlighted, “Management showcased a very credible vision to take the broader Parks assets well beyond a recovery back to pre-pandemic levels to instead driving sustainable, long-term growth through a sharp focus on the guest experience and storytelling, ongoing innovations in technology, and plans to extend the Disney magic to new formats.”

The rest of the Wall Street community echoes Feinseth’s and Maral’s viewpoint. They are bullish on the stock with a Strong Buy consensus rating based on 15 Buys and five Holds. The average Walt Disney price forecast is $190.89, implying 37.75% upside potential to early morning trading levels on Tuesday, at the time of writing.

Conclusion

Both the stocks have lost around one-fourth of their valuations over the past year due to growing concerns of stagnant subscriber growth that has reached its zenith, as well as other macro factors. However, with strong growth potential and lucrative TAM, there is still a huge runaway for growth for both Netflix and Disney.

The current valuations levels look extremely cheap for both stocks and thereby presents a huge buying opportunity for investors.

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