Analysts Favor Netflix Over Disney, Giving It A Nearly 30% Upside

Even though streaming services now face a lot of competition, Netflix and Disney remain two of the biggest names in the industry - and both are experiencing some significant challenges of their own.

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A major overhaul of Disney's operations has been announced by Bob Iger and he has announced a cost-saving plan of $5.5 billion. However, Disney is tussling with the governor of Florida Ron DeSantis, and investors are demanding more value.   

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By cracking down on password-sharing and boosting its ad-supported service, Netflix is aiming to reduce costs and increase revenue while at the same time reining costs.

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Both companies have been rated well by Wall Street analysts, with over 80% of them having a "buy" rating on Disney's stock and around 50% of them having a "buy" rating on Netflix's stock going forward.

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Analysts, however, see Disney as having a greater potential upside than Netflix, according to FactSet data: Disney gets a potential upside of 26%, while Netflix comes in at just 3.8%, based on analysts' estimates.

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In favor of Netflix

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Netflix is considered by Bank of America to be a world-class brand with a powerful subscriber base across the globe. On Monday, the bank named Netflix as one of its top picks for the second quarter.

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According to Jessica Ehrlich, an analyst at Citigroup, Netflix will continue to outperform due to the fact that it is cracking down on password sharing as well as the introduction of a value-oriented, ad-supported tier that expands its total addressable market as well as its monetization.

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There is also a positive investment bank view on Netflix, Wells Fargo, which predicts that Netflix will be able to boost earnings, while the share price of the company will continue to rise as the password crackdown continues.  

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Analyst Steven Cahall wrote in a note last week that Netflix's performance this year is largely driven by early optimism over the potential of paid account sharing for the stock compared to the S&P 500's 7.9% advance over the same period.

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The analyst at Atlantic Equities, Hamilton Faber, also keeps an "overweight" rating on Netflix. According to the analyst's Mar. 31 note, he projects the company's revenue and earnings per share for the year 2023 to be roughly 5% ahead of their consensus estimates.

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Diversification of Disney

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As a managing director at Rosenblatt Securities, Barton Crockett believes Disney's more diversified business lines will be in better stead than either of its stocks, but that it's having more diversified business lines will make the company more valuable in the long run.

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“As you can see, when you take a step back and look at the overall steaming market, this is a very challenging market. Netflix stands out as a leader. Disney stands out as an important player as well. According to him, I believe they can succeed in reaching profitability, but I think it is going to be a hard battle," he told CNBC's "Street Signs Asia" program on Tuesday.

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“I think there are a lot of players out there who are interested in getting into this market. That is why I think Disney has something to offer outside of streaming, which means you're not dependent on streaming, which is what you see with Netflix right now,” he added.

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Crockett points out that Disney's theme parks business, as an example, has shown "resilience," despite the challenges, which has provided "strong support" to the company while reducing its exposure to streaming.

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Additionally, Disney is improving its ability to generate advertising revenues through streaming and could be able to clamp down on password sharing more effectively than Netflix.   

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"We believe Disney has a higher percentage of ad-based subscribers than Netflix, so they might gain a greater share of this revenue soon," he said.

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The Netflix stock trades near a multiple of 30 times, so I think a lot of that discount is already in place. “I think Netflix is going to have a lot of leverage on revenue growth and cost discipline,” he said. Disney trades closer to 20 times. With the blending of businesses and the opportunities for improvement, I think Disney is more in my favor,” he said.

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In a note last week, Macquarie reiterated its "outperform" rating on Disney, emphasizing the direct-to-consumer channels' profitability as a key driver of the stock's performance.

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According to analyst Tim Nollen, Disney can reach its goals by cutting staff, rationalizing content spending, and finding creative ways to increase streaming revenue.

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