Buy Disney instead of Netflix, this fund manager says

The explosion of streaming content has been a boon for both the average TV watcher and for the entertainment business in general, but the trend has left investors feeling a little shaky about owning Netflix (Netflix Stock Quote, Chart, News NASDAQ:NFLX), which is now feeling the heat from new competitors like Disney.

And that nervousness is reasonable, said Christine Poole of GlobeInvest Capital, who thinks that for exposure in the streaming segment, Disney (Disney Stock Quote, Chart, News NYSE:DIS) is the better bet.

“We’ve never owned Netflix —they’re obviously the leader, a giant in that space before a lot of these companies started offering their streaming products,” said Poole, CEO and managing director at GlobeInvest, speaking to BNN Bloombing on Friday.

“Really, it has to do with valuation. The company is spending a lot and not a lot is falling to the bottom line which I guess you have to do that when you’re growing a business in a new category,” Poole said.

“And now that we have Disney+ and there’s Amazon and multiple players coming on, and they’re not all going to be successful but it is incremental competition and Netflix over the last few quarters has reported subscriber growth in the US has in some cases been actually negative, so they really have to look internationally to expand,” she said.

2019 was an up-and-down year for Netflix, which saw its share price climb 44 per cent over the first four months of the year only to lose steam over the second half. Year-to-date, NFLX is currently up 14 per cent.

The stock took a hit in July with the release of the company’s second quarter earnings which saw Netflix lose over 100,000 domestic subscribers, while global subscriber additions of 2.7 million were markedly lower than the company’s 5-million guidance. Management in part blamed the shortfalls on the previous quarter’s better numbers, along with pointing to a relative dry spell in terms of new and well-received content during its Q2.

But the company bounced back with its third quarter results in October which while still underwhelming on subscriber adds domestically tallied higher-than-expected international additions. The Q3 met analysts’ expectations on revenue while handily beating on earnings, pushing the stock up.

As far as the now-crowded arena of streaming players — including Disney+, Apple TV, NBC Universal’s Peacock and WarnerMedia’s HBO Max — Netflix management has remained sanguine, saying that linear TV is still the real competition, not other streaming companies.

“While the new competitors have some great titles (especially catalogue titles), none have the variety, diversity and quality of new original programming that we are producing around the world,” said Netflix in their quarterly comments to investors.

Poole says the volatility in the streaming space can be played best by buying Disney, which has streaming as only one of its segments.

“The expenses for these companies are going to continue to ramp up,” said Poole. “We’ve decided that Disney is our investment in the streaming space because obviously Disney has that streaming product but they also have other businesses that are making money, making lots of money and creating cash flow.”

Netflix’s fourth quarter results are scheduled for release on January 21, 2020.