For a brief time during yesterday’s trading Netflix (NFLX, Financial) passed Disney (DIS, Financial) in market capitalization. This is similar though not the same as Tesla (TSLA, Financial) being valued higher than Ford (F, Financial). It also represents a major disconnect between traders and investors in the market right now, and frankly, it scares me.
Over the last couple of years, I’ve written about Disney on multiple occasions, here in 2016 and here in 2017. In this particular case, The Walt Disney Company is still a growth story in many respects. And with new acquisitions, it will continue to dominate the market into the future. It owns Marvel, Lucas Films, ABC, ESPN, Pixar and all the parks and resorts that provide an amazing experience to millions of people annually. Disney is a brand on par with Coca-Cola and Apple. Its considerable brand value doesn’t even register on the books.
Netflix is a useful service, but there will likely never be a Netflix theme park or Netflix resorts. The value of its entire brand is in the recurring content it’s able to produce. It’s a valuable platform for now, and it will need to continue creating content at a deficit for years and years just to catch up to Disney’s 1990s archive.
Then there are the numbers, which clearly favor Disney. In the last 12 months the company generated a whopping $11.4 billion in net income on revenue of $56.9 billion. That includes gross margins of 45.2%, return on equity of 25.8% and capex spending of just 32% of net income.
Netflix, to its credit, has reinvested at scale very successfully, building its revenue, net profit and book value by approximately 10x over the last decade. However, the past does not equal the future, and to be on par with Disney on a profit basis, Netflix would have to generate 17x more in annual revenue.
Could (or rather will) Netflix eventually buy or launch a sports service of its own? Yes. By that point Disney may have fixed its ESPN problems with subscriber exits continuing to rise, and operating profit is on track for its third consecutive quarterly decline.
More Importantly, Disney is about to have its own digital platform in Hulu as it completes a deal with 21st Century Fox. If you want to stream Disney content, you’ll have to do it on Hulu at 8 bucks a month. Disney can keep that cost down because it makes money in so many ways. Netflix makes money one way.
The bottom line is this: Netflix is a great service but simply does not have the brand or financial power of Disney. Both stocks are mispriced. At most, Netflix should carry a similar price multiple to Facebook or Google, which would put the market value at roughly $40 billion. Disney on the other hand trades at just 13x forward earnings, which is 7 points lower than its historical price-earnings multiple of 20x, which means Disney should be in the $140 per share range.
Disclosure: I have no positions in any stock mentioned in this article.
