It is strange to think of Disney (NYSE:DIS) as the David against Goliath but, in this case, it is. Does that make it a worthy opponent stock to own over Netflix (NASDAQ:NFLX) for the next five years? In a word: yes.
Before you label me a NFLX hater, this is an assessment of risk and not a diss to Reed Hastings & Co. Since DIS reported in early February, Disney stock has come alive. The positive reaction to earnings was a fake out and shares of Disney fell before rallying twice for more than 15 percentage points, only to end up at about the same level as before the earnings. So, clearly, there is indecision on Wall Street with how to trade Disney stock.
What to do here with it depends on your timeframe. DIS has been a proven performing stock for decades so in the long run, betting on it rising is the smarter option. So those interested in owning it for the future this is as good a time as any to buy it.
Since 2012, DIS stock rallied 160% in leaps and bounds until it stagnated around $105 per share for the last four years. Unless the stock market is about to crash and go into a sustainable descending pattern, I consider this as a consolidation period for DIS before it set on another leap higher.
The theme park and movie successes are never in doubt. These are almost always packed houses. In fact, they keep raising the admission prices to their theme parks to manage capacity. That isn’t a bad problem to have.
More importantly, when investors got nervous over the traditional media side, management took corrective actions on that front. As a result, ESPN+ is no longer a concern. So the base is set for Disney to pursue new venues. Netflix changed the world, making it so that all media consumption is done via streaming. As a result, traditional media is migrating online.
To that, Disney recently took the fight to Netflix. It announced that it will launch Disney+, its own streaming service, pulling content from Netflix. Disney also made the bold acquisition of Fox’s major assets. This includes gaining a larger stake in Hulu, which immediately makes Disney a formidable threat to the current king of streaming.
Wall Street still doesn’t give DIS the respect it deserves there because it still trails NFLX stock by a long shot (DIS stock is barely positive while NFLX is up 33% YTD). In five years, DIS is up 38% to NFLX’s 640%. Clearly, the house of mouse has some catching up to do to win over more investors.
Fundamentally, the odds are on Disney’s side, but for now, NFLX has the momentum as long as it continues to grow aggressively abroad. How fast will Disney get out of the box is still a big question mark. History is on Disney’s side, at least.
Bottom Line on DIS Stock
In the meantime, DIS stock is cheap. It sells at a price-earnings ratio of 15x and only 3x book value. This is literally ten times cheaper than NFLX on both counts. That makes the upside potential much larger than the downside risk in DIS as a play on streaming business.
Conversely, NFLX has to execute flawlessly else its liable to fall whereas DIS has nothing but upside potential from streaming. Netflix clearly has the first-mover advantage, but that doesn’t count a lot when the competition has deep pockets and cheaper content.
The “cost of goods,” so to speak, is so much cheaper for DIS. However, Netflix is notorious for spending billions every year. Disney already has existing content every kid on the planet wants. It can also create new content much more cheaply than Netflix. This will give Disney an operating advantage, so it can compete with thinner margins than the behemoth Netflix.
Technically DIS stock is trading inside a five-year-long pivot zone. These usually are sticky because neither bulls or bears want to lose them, so they fight it out. In this case — while the bulls are still in charge of the stock market — this favors the upside for now.
Unless another shoe drops unexpectedly, DIS stock is likely to rally. So owning it here carries no undue risk to itself or the markets in general. Those who already own Disney stock and those who are familiar with options trading, should consider selling covered calls to create “synthetic dividends.” The implied volatility remains elevated while equity markets are still nervous about the geopolitical uncertainties from the tariff war and Brexit.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.