To The Moon

Below is a recap of our webinar, “Can Disney rise above Netflix in the streaming wars?” conducted on 19 Mar.

Please click here to watch the full webinar replay on Tiger Brokers App.

Content:

• Streaming Video Competitive Landscape: Winners and Losers

• CTV Ad Revenue

• Live Sports: The Next Streaming Frontier

• Netflix vs Disney

• Netflix Content Spending

• Netflix Pricing Power

• Netflix Revenue and Operating Income

• Netflix Subscriber Growth and ARM

• Netflix: Technical Analysis

• Disney Revenue and Operating Income

• Disney Streaming Business

• Why Losing Subscribers Can Be Beneficial

• Disney Movie Business

• Disney: Technical Analysis

• Conclusion and Investment Strategy

Who are the winners and losers in video streaming industry?

• If investors define the winners by the number of subscribers, then the clear winners are Netflix( $Netflix(NFLX)$ ) and Disney( $Walt Disney(DIS)$ ), which have 260 million and 225 million subscribers respectively.

• Some smaller or legacy players like Peacock, HBO Max, Paramount, Starz, and AMC are providing limited content offerings that potentially increase churn rates and hinder subscriber growth. Although some may boost advertising revenue, their lack of subscriber growth will likely limit future profitability.

• $Amazon.com(AMZN)$ Amazon’s Prime Video, Alphabet’s YouTube, and Apple’s Apple TV+ are part of their larger ecosystems aimed at enhancing user retention, but they are not primarily focused on driving platform profitability. I believe investors should view them favorably due to their existing core businesses, but not base investment theses solely on streaming growth.

Who leads in CTV ad revenue?

• US TV ad spending is expected to slow further, while Connected TV ad spending is expected to grow in the coming years.

• While many investors anticipate substantial CTV ad growth for Netflix, the current stronger ad players are Disney, which owns Hulu, Disney+, and ESPN+, and Amazon.

Is live sports the next frontier in streaming dominance?

• Live sports remain a primary factor preventing viewers from cutting the cord.

• However, streaming services are aggressively investing in sports rights to boost subscription revenue.

• Disney appears to have a solid sports roadmap, with ESPN partnering with Fox and Warner Bros. Discovery to launch a new streaming sports platform by 2024

Netflix vs Disney

• Investors may prefer Netflix due to its dominance in subscriber numbers, revenue growth, and profit margin.

Higher Content Spending: Not a Problem!

• Disney+ is reducing their content spending, while Netflix is increasing content spending from USD 13B in 2023 to USD 17B in 2024 to attract more subscribers and potentially lower churn rates.

• The cash content to amortized ratio of 0.9x in 2023 suggests that Netflix is effectively spreading out the costs of producing or acquiring content over time.

Strong Pricing Power

• Netflix exhibits the strongest pricing power in the streaming industry.

• Past pricing strategies include:

1. Replacing the lowest tier with an ad-supported option.

2. Increasing prices for standard and premium tiers.

3. Implementing crackdowns on password sharing.

• We expect ad-supported tier price increases once Netflix reaches substantial ad-supporter tier subscriber numbers.

Revenue and Operating Income

• Both revenue and operating income growth experienced a reacceleration.

• In the latest quarter, year-over-year revenue growth was 12%, while year-over-year operating income growth reached an impressive 172%.

Strong Subscribers Growth and ARM

• The average number of subscribers in the latest quarter was 253 million.

• The average revenue per membership (ARM) was USD11.6.

Revenue and Operating Income

• While the year-over-year revenue growth was 0%, operating income saw a 27% increase in the latest quarter.

• This suggests that there is no organic growth in Disney, and the main contributing factor to the growth in operating income was cost-cutting measures.

Streaming Business

• While the operating margin for the Direct-to-Consumer (DTC) streaming business remains negative at -3.6% in 1Q2024, the operating income has continued to improve.

• CEO Bob Iger reaffirmed that the Streaming Business will turn profitable by 4Q2024.

Why is Losing Subscribers Actually Good?

• Subscribers loss might be deliberate as Disney aims to drive down the subscribers no in the unprofitable Disney+ Hotstar bundle.

• The ARPU for  Disney+ Hotstar bundle was just USD1.28, while the ARPU for the normal Disney+ was USD6.84.

• Fortunately for Disney, Netflix is raising its subscription price. which gives Disney the opportunity to do the same.

Investors are still awaiting a comeback in the movie business.

• The movie business was quite profitable in the past, contributing about USD 2-3 billion in terms of operating income in 2017, 2018, and 2019. However, it incurred a USD 179 million loss in 2023.

• There's still significant potential in the movie industry, and Disney is likely the best movie play given their massive popular IPs.

Conclusion:

Netflix

• Essentially, Netflix has already emerged as the winner in the first phase of the streaming wars, leading in terms of subscriber count, profit margin, and market share.

• In terms of past performance, Netflix typically outperformed in the yearly return category. Additionally, Netflix delivered a 20-year annualized return of 27.89%, outperforming Disney (+8.73%), the S&P 500 (+10.02%), and the Nasdaq-100 (+14.41%).

• Investing in Netflix is riskier. Netflix has a significantly higher maximum drawdown and standard deviation compared to the rest.

• Netflix's future focus should lie in advertising growth, as analysts are predicting stronger year-over-year growth in advertising revenue.

• Netflix is probably still the best story in the streaming industry. However, my main concern is how much upside remains from the password crackdown, as Netflix has already been cracking down on password sharing since 2022, now in more than 100 other countries.

Disney

• When considering connected TV advertising and live sports in the streaming landscape, Disney currently has the upper hand.

• Disney holds the largest market share in terms of connected TV advertising and has a better live sports roadmap relative to Netflix.

• Disney is focusing on cutting losses to return to profitability, but it lacks top-line revenue growth and subscriber growth.

• Uncertainties:

1. Who will succeed Bob Iger as the next CEO?

2. What will happen to the ongoing Disney lawsuit against Ron DeSantis?

3. What is the outcome of the lawsuit alleging that Disney 'Misled' Investors About Disney+ profitability?

Investment Strategy:

• If an investor seeks to gain exposure to video streaming, having Netflix alone in the portfolio may not be sufficient. Probably a better investment approach is to include both Netflix and Disney in one's portfolio.

• For an aggressive, purely stock portfolio, allocating 5-8% to media stocks may be ample. However, investors probably should have a higher weight in Netflix and a lower weight in Disney.

• For instance, an aggressive US portfolio might have a 5% allocation to Netflix and a 3% allocation to Disney.