Disney has a monster advantage over Netflix in the streaming wars. here’s why

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The streaming wars have intensified over the past two months as more companies enter the fray with a limited number of target customers. The huge number of new members during the early stages of the pandemic made it harder to add more, and every company is pouring money into content and distribution in the race to the top.

Both leaders are currently netflix (NFLX -5.15%)which has dominated the industry for years and has over 220 million subscriptions, and disney (SAY -2.32%), which has grown its paying customer base to more than 205 million over the past three years. While both companies are upping their game, Disney has a major advantage over Netflix, and investors shouldn’t ignore it.

Disney’s Secret Sauce

Netflix is ​​under a lot of pressure to invest in content, and those costs have to be covered by subscriptions. Investors may not realize that for years Netflix was able to post profits even though its cash flow was negative due to depreciation. In other words, subscription fees alone were not enough to cover the costs of content production. You cannot make these expenses disappear, which is why they appeared as cash outflows.

However, you can eliminate them from the income statement by recording only a percentage of them as expenses, amortized over time. During those years, investors didn’t care about this wobbly record and they were richly rewarded when the stock price soared. They were also vindicated when the company finally made enough money to become cash flow positive even with its content production. This only happened in 2020 when subscriptions increased.

NFLX Free Cash Flow given by Y-Charts

He faces new pressures now that the competition has intensified and he needs tons of high-quality content to retain his subscribers. He expects a drop in subscriber numbers in the second quarter.

However, we are really talking about Disney and its edge here. And it has a huge advantage in its movie releases and ticket sales, a pattern that, in its current form, Netflix doesn’t use. Disney’s traditional theatrical release model gives it ample opportunity to cover production costs before a movie gets anywhere near your streaming device. For example, his current success, Marvel’s Doctor Strange in the Multiverse of Madnesshas grossed nearly $1 billion since its release in May.

Disney is also investing in direct-to-stream content, but a big chunk of its investment right now is in marketing. Currently, much of its content is recycled. The massive amounts of ticket sales also cover cash outflows for other content productions, allowing it to bring more content to the streaming table without increasing the company’s losses.

Disney+ is still posting losses partly due to production costs. It’s only available in select locations, and is slated to launch in 53 countries in 2022. Once Disney+ is fully rolled out, recurring revenue from monthly subscriptions adds to ticket sales, which are usually profitable on their own. Netflix lacks this vital ingredient. Management expects Disney+ to be profitable on its own by 2024, just two years from now, and the company likely sees that recurring revenue as a key driver.

Disney is also a winner for other reasons

Disney and Netflix may have comparable streaming businesses, but Disney as a company encompasses many other things. Streaming kept it strong when parks and theaters were closed, and now that streaming competition is heating up, parks and movie releases are an important part of its growth and viability. Being a leader in every part of its diverse business operations makes Disney a standout stock. With Disney shares down 37% this year, investors might consider adding stocks to their portfolios.

Jennifer Sabil has positions at Walt Disney. The Motley Fool holds positions and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: January 2024 long calls at $145 on Walt Disney and January 2024 short calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.

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