Disney Stock Poised for Gains If Netflix Competition Fuels Content Push

Luke Lango

Updated Mon, Sep 24, 2018, 3:01 AM

No doubt about it, the coming attractions for streaming showdown between Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX) have a lot of DIS stock investors on the edge of their seats.

Netflix, the innovative streaming giant, currently owns the streaming space with a 100 million-plus global subscriber base and tons of original content. Disney, meanwhile, is the traditional media giant that has struggled with content distribution of late, but owns some of the best content franchises in the world. That content gives it strong footing as it prepares to bundle those franchises into its own streaming service next year. Let the battle begin!

I’ve long been bullish on Disney’s chances in that showdown. Between Star Wars, Marvel, Pixar, and now Fox, Disney owns some of the world’s best known and most profitable content. That content has massive demand, and as such, Disney streaming should hold its own against Netflix. A scenario where Disney streaming becomes a multi-million subscriber service would fuel Disney stock significantly higher.

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But, there is one big risk to that thesis: the pace of content production.

Why Disney Needs To Accelerate Content Production

Netflix is partly so successful because its original content is good… and there’s so much of it. Netflix is set to release 80 original films, adding to the roughly 700 original shows on the streaming platform.

Disney’s release schedule? Around 10 movies this year.

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Clearly, Disney needs to accelerate its content production rate to compete with Netflix in the streaming wars. If they don’t, Disney shares could struggle. If they do, however, DIS stock could pop.

As a Netflix subscriber, I feel like I’m getting my money’s worth, not just because of the quality of content on the platform, but also because of the volume of content on the platform. Netflix has so many original shows and movies that, outside of sports, news, and occasionally going to the movie theater, I don’t need to watch anything but Netflix.

My suspicion is there are a lot consumers out there who feel the same way. That’s why despite paid streaming being a big trend, the only truly massive player in the space right now is Netflix.

Disney has an opportunity to be the second massive player in this space. They compete with, and arguably beat, Netflix when it comes to content quality. This much is obvious. Just look at recent box office results to see how Disney dominates the big screen. Clearly, demand for DIS content is huge.

Without accelerated original content production, Disney streaming’s reach — and it’s ability to push DIS stock higher — will be limited. The service will get a handful of Disney enthusiasts, but most people will just stick to their current strategy of subscribing to Netflix, and catching Disney movies on the big screen.

Risk-Reward Is Favorable On Disney Stock

Although it looks like Disney’s big-screen content production of Star Wars films may slow, that doesn’t say much about the company’s streaming content production strategy. Instead, considering that Disney is already working on original programming for the streaming platform, I think that Disney will inevitably ramp streaming content production to be more on par with Netflix.

That will be a costly pursuit — Netflix is investing as much as $8 billion on original content. But, it is one that will ultimately send Disney stock way higher.

Disney stock hasn’t gone anywhere for several years. It has been range-bound while the market has soared to all-time highs, and Netflix has made its investors fabulously wealthy.

But, that means that at current levels, Disney stock is ready for a rally. The valuation is cheap at under 16X forward earnings. Growth is stable, with revenues last quarter up 7% year-over-year. And, whenever Disney stock does go sideways for an extended period of time, it is usually followed by a big rally.

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I think that is exactly what you will get with Disney stock over the next several years. The company will accelerate its content production pace. The streaming platform will launch to big demand. Demand will only build as content production accelerates further. And, Disney stock will soar as the company leaves the era of cord-cutting behind it and embraces a new era of streaming subscriber growth.

Bottom Line on DIS Stock

The one big risk to Disney stock at current levels is that the streaming platform doesn’t take off. That will only happen if Disney doesn’t successfully ramp original content production.

The likelihood that that risk materializes is low. As such, the most-likely path forward for Disney stock is higher thanks to robust streaming service adoption in 2019.

As of this writing, Luke Lango was long DIS and NFLX.