Since its IPO in 2002, Netflix has been one of the best stocks an investor could own. It now finds itself going head to head with Disney, one of the most successful companies of all time.

Last year, Disney announced that it was launching its own streaming service. It also acquired 21st Century Fox along with all of its content and pulled all the Disney content from Netflix. When new details about its streaming service were announced last week, the share price jumped 11% as analysts upgraded the stock and proclaimed Disney the winner of the streaming wars. So, is the hype warranted?

 

Are the Good Times Over for Netflix?

If consumers are happy to pay for multiple streaming services, there will be room for everyone. However, if consumers become more discerning with regard to quality, Netflix may have a problem.

Every few years Netflix has a weaker quarter and investors start wondering if the good times are over. And so far, it’s bounced back every time. This week Netflix announced that it has added 9.6 million new subscribers, proving that it is gaining traction around the world. Revenue and net income grew 22% and 16%, respectively, though some analysts are concerned about its rising costs.

For Netflix, growth in the U.S. has certainly slowed. But it has strong momentum overseas and still has space to grow. The share isn’t cheap, but then again, it has never been cheap.

For Netflix, the future really depends on how the market evolves. If consumers are happy to pay for multiple streaming services, there will be room for everyone. However, if consumers become more discerning with regard to quality, Netflix may have a problem. Disney owns some of the best content in the world, and Amazon and Apple have deep pockets to produce new content.

 

Disney – Not Just About Streaming

First, it’s worth remembering that Disney owns lots of assets, and even if its streaming service is very successful, it will only be a relatively small part of the business. Disney has been making investments across all of its businesses over the last few years. It also lost money on Hulu and ESPN in the last year, and now it’s losing out on the revenue it has been earning from Netflix.

In addition, Disney spent around $18 billion acquiring Fox (the total cost was $71 billion, but part of that was paid for with new shares) and assumed $14 billion in debt from Fox. These investments are almost certain to pay off in the long run, but for the next few years, they will weigh on Disney’s earnings.

Looking at the numbers, Netflix now has 148 million paying subscribers and generates revenue of $16 billion a year. Disney plans to charge $6.99 for its prime service. At that price, if Disney was to acquire as many subscribers as Netflix, it would be earning an additional $12 billion in revenue – 20% more than it earns now. In addition, Disney already owns enough content, unlike Netflix which has to constantly spend money to create new content. But that won’t happen overnight – It will take years for Disney to build that sort of subscriber base.

 

The Verdict

For now, Netflix looks solid, but it may run into trouble if its competitors can produce notably better content. The stock is fully priced and has historically been a better buy on bad news. It may not be a sell at current levels, but it’s not a buy either.

Disney is cheaper, has more room to grow, has a huge library of high-quality content, and of course, it has a whole range of other excellent assets. At the right price, it will make an excellent long-term investment. But, investors are unlikely to see its growth accelerate any time soon – so there’s a good chance there will be a better opportunity. Ultimately, Disney has more going for it, but now may not be the time to buy.