With binge-worthy shows like Bridgerton, Inventing Anna, and The Last Kingdom--in addition to scads of movies--Netflix NFLX remains the most popular streaming service worldwide. But new competitors are nipping at its heels. One of the biggest nippers: Disney+. With a massive catalog that includes the Marvel and Star Wars franchises as well as Pixar and Disney DIS classics, Disney+ is becoming a formidable competitor. In fact, Disney+ added 7.8 million customers in the latest quarter while Netflix lost 200,000 customers. Neither stock is performing well this year, with Netflix stock down more than twice as much as Disney stock thus far in 2022.
Given their price declines this year, is there an opportunity for investors today? We’re pitting the stocks of these two contenders in the streaming wars against each other to determine which is the better investment today based on a few of Morningstar’s proprietary metrics. Is it time to buy Netflix stock? Or is it time to buy Disney stock?
Here's how Disney and Netflix score on a few of Morningstar's key investment metrics as of May 12, 2022:
Disney stock DIS
- Price/Fair Value: 0.62
- Fair Value Uncertainty: High
- Economic Moat: Wide
- Capital Allocation Rating: Standard
Netflix stock NFLX
- Price/Fair Value: 0.59
- Fair Value Uncertainty: Very High
- Economic Moat: Narrow
- Capital Allocation Rating: Standard
Price/Fair Value Winner: Slight Edge to Netflix
Morningstar’s analysts calculate a fair value estimate for each stock they cover. The fair value estimate represents the intrinsic value of a stock, based on how much cash we think the company can generate in the future. A stock’s price/fair value is simply its current market price divided by the fair value estimate. A stock trading below 1.0 is undervalued; a stock trading around 1.0 is fairly valued; and a stock trading above 1.0 is overvalued.
As of this writing, we think Disney’s stock is about 38% undervalued Netflix’s stock is 41% undervalued. Given the modest difference, many investors would call this a tie. But from a pure percentage standpoint, Netflix stock is slightly more undervalued than Disney stock is.
Watch: The Morningstar Fair Value Estimate
Uncertainty Winner: Disney
Morningstar's uncertainty rating represents the predictability of the company's future cash flows and, therefore, the level of certainty we have in our fair value estimate of a given company. Companies that enjoy sales predictability, modest operating and financial leverage, and limited exposure to contingent events carry low uncertainty; those with less predictable sales, significant leverage, and significant exposure to contingent events carry higher uncertainty.
Our analyst thinks Disney’s cash flow uncertainty is high--but Netflix’s uncertainty is even higher. Disney wins for its relatively lower uncertainty because we’re more confident in our fair value estimate for that stock.
Economic Moat Winner: Disney
The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come. A company whose competitive advantages we expect to last more than 20 years has a wide moat, one that can fend off its rivals for 10 years has a narrow moat, while a firm with either no advantage or one that we think will quickly dissipate has no moat.
Our analyst thinks Disney has carved out a wide economic moat (based on its various businesses, not strictly its streaming service), while Netflix has only built a narrow economic moat. Disney for the win on this metric.
Watch: The Morningstar Economic Moat Rating
Capital Allocation Winner: Tie
The Morningstar Capital Allocation Rating represents our assessment of how well a company manages its balance sheet, investments, and shareholder distributions. Analysts assign each company one of three ratings--Exemplary, Standard, or Poor--based on their assessments of how well a management team provides shareholder returns. Adept corporate managers can make a good company even better.
Both Disney and Netflix earn standard ratings when it comes to capital allocation.
Watch: Introducing the Morningstar Capital Allocation Rating
Which Is the Best Stock to Buy Today?
At the end of the day, the “winner” of any cage match from Morningstar’s perspective is the stock that’s trading at the largest discount to our fair value estimate after being adjusted for uncertainty. The Morningstar Rating for stocks encapsulates just that. Stocks rated 4 and 5 stars are undervalued after being adjusted for uncertainty, stocks rated 3 stars are fairly valued, and stocks rated 1 or 2 stars are overvalued after being adjusted for uncertainty.
Both Disney and Netflix earn 4-star ratings as of this writing, suggesting they're both undervalued after adjusting for uncertainty. So how can an investor decide between the two stocks? Investors can lean into other metrics--including Morningstar's--to help decide. All else being equal, we think a wide-moat stock carries more business durability than a narrow-moat stock, which would give Disney stock the edge here, particularly for those investors who favor high-quality stocks.
Watch: The Morningstar Rating for Stocks