Investors in club holding Disney (DIS) appear to have been heartened by streaming competitor Netflix (NFLX)’s better-than-expected third-quarter results on Wednesday — an assessment that’s not misguided but requires some context. Disney shares outperformed the broader market on Wednesday, rising about 0.7% to about $99 a share, while the S&P 500 lost 0.8% in midday trade. Disney’s uptrend came as Netflix surged more than 12% on strong subscriber gains, breaking a consecutive two-quarter streak in which the company lost paying customers while beating estimates for revenue and earnings. Subscriber Growth We believe the Netflix quarter provided a positive outlook for Disney on the streaming front. That’s important, even as we’ve argued for months that Wall Street’s intense focus on Disney’s streaming ambitions is causing the company’s booming theme park business to be somewhat overlooked. In the first six months of the year, Netflix collectively lost more than 1 million subscribers, and many investors were also heading towards the exit. However, on Tuesday night, Netflix announced that it had added 2.41 million subscribers worldwide in the three months ended Sept. 30. Netflix management intends to downplay subscriber growth as a metric after the prospect of an ad-supported version of the streaming platform, as well as a paid password-sharing product. Still, some on Wall Street were heartened to see Netflix returning to subscriber growth in the third quarter, suggesting the storm clouds could be clearing. “The dark days are over. If there’s one unified narrative for NFLX in Q3’22, it’s that the worst is about to emerge,” Wells Fargo analyst Steven Cahall wrote in a research note Tuesday. In general, Netflix and Disney are very different companies — a point we made clear in July when Netflix released its second-quarter results. Simply put, Disney is an expert at creating beloved fictional worlds and then monetizing these iconic franchises through films and shows, theme park attractions, and merchandise. Netflix, on the other hand, focuses solely on making moves and TV shows streamable. When it comes to streaming, Netflix is a lot more mature, having first launched in 2007 with basic digital streaming before scaling up and starting to make its own shows. Netflix brought its streaming service to over 130 countries around the world for more than three years before Disney’s flagship streaming service, Disney+, launched in the US and Canada in the fall of 2019. Still expanding into new countries, Disney serves as a natural source of subscriber growth that has largely dried up for Netflix. Disney+ added 22.3 million subscribers combined over the past two quarters, which coincided with the period of Netflix’s paid subscriber losses. That explains why we view Netflix’s new subscriber gains as a positive for Disney. Even in a period of Netflix’s demise, Disney+ has continued to grow at a solid pace. Now, Netflix’s turnaround in subscribers could indicate that the overall streaming environment has become more affordable, giving Disney even more tailwind. Disney’s fourth-quarter financial results and full-year 2022 results are scheduled to be released after the market close on Nov. 8. According to FactSet, analysts expect the company to have added 9.1 million Disney+ subscribers in the fourth quarter. Ad Versions Another big topic surrounding Netflix’s earnings report is its upcoming ad-supported tier, which will roll out in 12 countries including the US, Canada and Japan early next month. In the US it will be $6.99 per month starting November 3rd. This is notable for Disney, as an ad-supported version of Disney+ is slated to launch in the US on December 8 and will cost $7.99 per month. Disney+ without ads is also currently $7.99. However, it will increase to $10.99 monthly once the ad-supported tier is live. Netflix management has expressed optimism about the upcoming launch, and Chief Operating Officer Gregory Peters said demand from advertisers on Wednesday was “very, very strong.” Peters also noted how quickly Netflix’s ad-supported product came about, shipping in about six months in partnership with Microsoft. While Netflix’s ad tier will outperform Disney+ in the US market by about a month, we’re generally optimistic about Disney’s ability to compete in the digital advertising space. That’s largely because Disney has deep roots in the advertising world, both in linear television — through its ownership of ESPN and other cable channels — and through its majority stake in Hulu, a streaming service that has long offered plans with ads. Netflix had resisted calls to put advertising on its service for years before publicly changing its mind last spring. In general, amid the current economic slowdown, it’s heartening to hear that advertisers are interested in what Netflix is offering. We just think Disney has a superior position in the race for streaming ad dollars next year. Barton Crockett, an analyst at Rosenblatt Securities, made a similar statement in a CNBC interview on Wednesday. “Disney, I think, will smack Netflix in the eyeballs [subscription video on-demand] Advertising. We believe Disney will be the better ad story than Netflix in 2023,” Crockett told CNBC. (Jim Cramer’s Charitable Trust is long DIS. For a full list of stocks click here.) Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim discussed a stock on CNBC television, he will wait 72 hours after the trade alert is issued before executing the trade. 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An inflatable Disney+ logo is pictured at a press event ahead of the launch of a streaming service in the Middle East and North Africa at the Dubai Opera in Dubai, United Arab Emirates June 7, 2022.
Yousef Saba | reuters
Investors in Club Holding Disney (DIS) seem to have been encouraged by the streaming competitor Netflix‘s (NFLX) better-than-expected third-quarter results on Wednesday — a sentiment that’s not misguided but requires some context.