Investing in Disney (DIS) - Get Walt Disney Company Report right now offers investors a strong upside potential with minimal downside. For now, despite the strong rally on Friday of more than 11%, and Monday's additional rise of 1.4%, the stock's risk-reward balance remains skewed to the upside. Here's why.
Disney+ - Is It Meaningful?
In contrast with Apple's (AAPL) - Get Apple Inc. (AAPL) Report big "It's Show Time" event in early March, which was heavy on glitz but light on details, Disney's came out swinging on Thursday on its Investor Day. Disney not only told a strong narrative that investors had been craving to hear, but backed its narrative up with plenty of numbers.
Arguably, one of the most meaningful numbers that Disney shared was an expectation of its global subscriber number hitting somewhere between 60 million and 90 million. To which readers should immediately raise eyebrows and ask when? Well, that's the thing. Nearly all of Disney's targets were focused on delivering meaningful shareholder value over a five-year horizon -- by 2024.
On the one hand, starting from scratch and then dangling this carrot years out seems like a stretch for investors. On the other hand, right now investors are not being asked to pay much, if anything, for the potential that Disney succeeds here.
Stepping back slightly, after Disney's strong rally on Friday, in which the volume of shares bought was amongst the highest in the past five years, and an additional gain on Monday, its market cap stands at about $237 billion. Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report , on the other hand, has a current market cap of around $150 billion (the company reports its first-quarter earnings on Tuesday after the close; TheStreet will be live blogging the earnings report and video interview).
If Disney delivers a strong platform and gains significant share, some portion of Netflix's market cap could be added onto to Disney's current market cap. Just how much? It's hard to say, but it could be significant, with relatively little downside.
Here are some other interesting comparisons between these two juggernauts. Disney is guiding analyst and investors that its original content investment is going to ramp up from above $1 billion in fiscal 2020 to mid $2 billion in 2024.
Netflix on the other hand, spent roughly $12 billion on content in 2018 and is expected to spend $15 billion in 2019. Put another way, Disney is mostly looking into releasing its treasure trove of previously released titles, whereas Netflix has to create its content from scratch.
There is a lot more risk involved in creating original content versus releasing titles that have already proved themselves to be blockbusters. One could argue about the freshness of outdated content. However, titles like Lady and The Tramp or The Lion King are timeless.
Conversely, if we think about Netflix's strategy with the Will Smith vehicle Bright, Netflix spent $90 million on that movie, but user responses were truly appalling, with Rotten Tomatoes rating it at just 25%. And now, Netflix has announced it will shoot a sequel.
Why, you may ask? Because Netflix's strategy is about making a splash and generating buzz, and keeping its platform sounding fresh, as word of mouth makes for outstanding marketing. For Netflix, this strategy of spending large sums on uncertain projects like Bright might have worked back in 2017 when its platform held a dominant position in the market. Going forward, when Netflix has to compete with some many different offerings, such as Disney+, this makes for an expensive and risky undertaking.
Will Consumers Choose Disney+?
Netflix, once regarded as the low-priced streaming platform, is now priced at $13 per month for the Standard Plan, its most popular. Disney+ is going to be launched at $6.99 per month. Historically, Netflix argued that there was plenty of viewing time in the day for consumers to subscribe to more than one streaming service. Of course, those statements were made back in 2017-2018 when Netflix was seen as this industry's disruptor.
Disney's CEO Robert Iger has made it clear from the start that if Disney wishes to gain market share it has to offer something differentiated from Netflix. Disney+'s strategy is focused on quality versus Netflix's quantity.
It's important to note, though, that where Netflix has succeeded is in developing original content that resonates with users. If Disney is to succeed, it too must have a strong portfolio of exclusive content on its platform, meaning withdrawing its licensed titles from competitor's platforms and losing a profitable revenue stream.
The Bottom Line
For Disney, its upcoming Q2 2019 earnings call will be a key opportunity to reinforce to investors its financial game plan for the next five years. For Netflix, retelling the same story on Tuesday that it did last quarter simply won't cut it. They will have to deliver some type of positive surprise if they wish to continue to be traded as a growth story.
I have no positions in any stocks mentioned.