And on Friday, Netflix’s market valuation climbed above Disney’s for the first time in about a year — ironically, coming on “Disney Plus Day,” the Mouse House’s company-wide marketing event designed to punch up excitement and subscriber signups for the two-year-old streaming service.
Netflix shares closed up 3.8% in regular trading Friday, giving it a market capitalization of $302.4 billion. Year to date, the streamer’s stock price is up more than 29%. Disney shares fell 1.5%, yielding a market cap of $290 billion.
The drop in Disney’s share price was on top of a 7% slide on Thursday, coming after the media conglomerate posted September quarter results that missed Wall Street targets. In the period, the company reported a net gain of just 2.1 million Disney Plus subscribers — its slowest growth since launching two years ago and well under analyst estimates. Company execs said the service is still on target to hit the long-term target of 230 million-260 million Disney Plus customers by September 2024.
Overall, Wall Street analysts remain bullish on Disney’s multiyear trajectory, despite the miss in the most recent quarter. Disney’s streaming-first strategy has boosted its stock price over the last 18 months, giving it closer to a Netflix-like valuation. Since March 2020, Disney shares are up about 85% (but down 10% year-to-date in 2021).
In a research note Thursday, Morgan Stanley analyst Ben Swinburne reiterated the firm’s “overweight” rating on Disney’s stock. The buy-rating thesis, Swinburne wrote, “is based on the view that Disney is one of a shortlist of global streaming platforms that can achieve significant scale and profitability.” That, combined growth at its parks business and an earnings mix shift away from legacy media earnings, is projected to increase Disney’s adjusted earnings per share from $2 for fiscal year 2021 to $10 in FY2025, per Morgan Stanley’s model.
But according to MoffettNathanson’s Michael Nathanson, investors are incorrectly valuing streaming businesses by using revenue valuation multiples to benchmark equity values, rather than free cash flow.
“In the simplest terms, we would think that a company that is valued at close to $300 billion in equity value like Netflix should generate a 3% to 5% free cash flow yield (or $9 billion to $15 billion) a year or so out. Hint: they likely won’t,” he wrote in a note to clients Thursday. “Yet, with this comp and despite massive negative revisions to legacy earnings, Disney has been re-rated higher due to their [direct-to-consumer] exposure.”
A true sum-of-the-parts valuation for Disney, according to Nathanson, “is virtually impossible due to the internal licensing of content and the shared cost of sports rights across linear and streaming.”