Entertainment giant The Walt Disney Co. DIS is getting its business strategy right: leverage its core capabilities in producing original content to address the different segments of the video streaming market.
For years, Disney's management saw video streaming as a disruptor to its core businesses, leaving the entire market to Netflix NFLX.
That's how Netflix became the "king" of subscription streaming entertainment services.
Apparently, this was the wrong strategy. Disney's revenues stagnated and earnings declined, while Netflix's soared.
| Disney | Netflix | |
| 3-year Revenue Growth (%) | 1.2 | 30.40 |
| 3-year EBITDA Growth (%) | -35.5 | 29.8 |
| Current Operating Margin (%) | 5.83 | 17.17 |
| Market Price | $175.73 | $503.22 |
| Intrinsic Value | $109.86 | $529.96 |
Meanwhile, Disney barely created any value for its capital holders, as evidenced by low-digit economic profits.
Last year, Disney's policy changed when the company entered the video streaming market aggressively with different product bundles to cater to different viewers' needs.
This policy shift has performed miracles for the company.
Last week, Disney's management told investors that it expects to reach 300 million to 350 million subscribers worldwide for its Disney+ Hulu, ESPN+ streaming services by 2024 -- up from about 137 million today.
That's almost twice the number of subscribers Netflix expects to enlist to its network in 2020.
Quo Vadis Capital President John Zolidis is optimistic about Disney's prospects to overtake Netflix as the world's largest streaming service provider.
"The bottom line when thinking about Disney vs. Netflix is that subscriber numbers are driven by content," he said. "Disney has collectively though its properties and franchises the best content creation engine in the world. Disney is superior to Netflix in this regard. Consequently, Disney+ is poised to continue adding subscribers at a torrid pace and ultimately overtake Netflix as the world's largest streaming service, in our opinion."
Wall Street has taken notice. Disney's shares have gained 33.37% in the last three months, while Netflix has risen 3.95%.
Still, Wall Street may have run too far too fast for discounting the company's streaming prospects.
Disney's shares, currently at $175.73, trade well above Peter Lynch's earnings line and the company's intrinsic value of $109.86.
These valuations give investors no margin of error if Disney's performance falls short of management's optimistic expectations.
That could perhaps explain why the vast majority of gurus have been reducing rather than adding to their positions in Disney in recent months.
Disclosure: I own shares of Disney.
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