Before we start with Battalion’s plan to tackle the two media giants, I first want to reiterate the importance of the inverted yield curve event from August, you can read the article here. That being said remember any investment moves made after this type of event should be done so with cautiously and I will (for the most part) be keeping some cash on the sidelines whilst the next 24 months play out. I like the thought of having cash ready should the market dip and a good buying opportunity arise. That being said one trade that I’ve recently made is to go long on Disney (DIS) via a CFD and at the same time placing an options market put on Netflix (NFLX) expiring in January 2021.
So why Disney and not Netflix? Well, in the midst of any global uncertainty, defensive stocks with low price multiples look particularly attractive. Disney has a P/E of 16.82 & Market Cap of 235.79B whilst Netflix has a P/E of a whopping 87.96 & Market Cap 120.651B.
Netflix’s business model is simply a core streaming service, which has limited income streams. On the other hand, Disney which is about to launch its new streaming service called Disney Plus next month has a more diversified stream of revenue (movies, theme parks, merchandise etc).
Netflix spends billions of dollars annually on new content whilst media giants such as Disney or Comcast (CMCSA) have instant libraries to utilise. The lack of original content forces Netflix to raise capital through bonds further increasing their debt which sits over $12 Billion USD.
If I could become rather rudimentary and ignore every technical indicator and focus on one thing it would be the market cap for both brands.
Disney – 235.79B
Netflix – 120.651B
Difference – 115.139B
If you subtract Disney and Netflix’s market caps – with the assumption that the Netflix market cap of 120B is “fair value” for a streaming business – it suggests that the remaining assets of Disney (Marvel, Star Wars, Theme Parks etc) hold a “fair value” of 115B.
Also, I am a Star Wars fan (so excuse the subjective bias as I am one of a vast plethora of force-loving fans). Disney, not only has a live-action Star Wars show blasting its way on our screens via Disney Plus, but it also has (perhaps) the biggest movie release of the year in Star Wars Episode 9: Rise of Skywalker. Netflix has had some amazing success with offerings such as Stranger Things, Bird Box and it’s Breaking Bad movie but in my opinion, there isn’t enough big-ticket content to compete with Disney’s library.
Overall I think there is a place for Netflix as more people cut the cord, however in my opinion, I firmly believe that Netflix is valued too high and Disney is valued too low.