We're buying Disney as the stock drops on Netflix's streaming troubles

Published Wed, Apr 20 20228:47 AM EDTUpdated Wed, Apr 20 20228:54 AM EDT

We're buying 25 shares of Disney (DIS) at roughly $125.60 each. Following Wednesday's trade, the portfolio will own 975 shares of Disney, increasing its weighting in the portfolio to 3.91% from 3.81%. Shares of Disney were falling more than 5% in Wednesday's premarket trading in sympathy with Netflix's over 27% stock collapse. While quarterly revenue and earnings-per-share results were basically fine, the focus for Netflix investors has always been on subscriber numbers, and those numbers were terrible. Netflix massively underperformed low expectations Tuesday night, reporting a first-quarter subscriber loss of 200,000 compared with 2.73 million adds expected. If you thought that was bad, Netflix's guidance for the current quarter was for a net subscriber loss of 2 million compared with expectations of 2.5 million in adds. The Netflix release Tuesday night raises a slew of questions about the video streaming giant and the industry at-large. Are people cutting back on streaming services as part of the shift away from the stay-at-home activities enjoyed during the pandemic and into experiences, like dining and travel? Is rapid inflation impacting the budgets of households around the world, forcing them to cut back on discretionary subscriptions like streaming services? Does Netflix not have the pricing power we all believed it had, resulting in higher churn? The company raised prices across all of its U.S. plans earlier this year. Or is Netflix's problem mostly the result of the estimated 100 million additional households' passwords being shared with, and therefore not charged? Clearly, Netflix's report created a lot of uncertainty about the health of the streaming industry, causing the selloff of pretty much every stock in the streaming service ecosystem, including Disney. But is the selloff in Disney justified? Let's explore. First off, let's make sure we all understand that the suspension of Netflix's service in Russia and the winding-down of all Russian paid memberships resulted in a subscriber decline roughly 700,000 this quarter. Disney+ never launched in Russia so we don't have to worry about any loss of subscribers there. Second, we think the type of content Disney provides to its customers is very different from Netflix in a good way. Netflix's model right now is to fill its service with huge library of content. Good or bad reviews? It doesn't matter. It gets added to the service because Netflix wants to fill out its library. Contrast that with Disney and how it specializes in iconic franchises and world building. Whether it be the Marvel Cinematic Universe (MCU), Star Wars, Disney Princesses, or Pixar, no one has been able to replicate Disney's success of unmatched story telling across expanding narratives. Then what Disney does is monetize those franchises like crazy through consumer products, theme parks, cruises, and immersive experiences, like the recently launched Star Wars: Galactic Starcruiser Adventure which it can charge an astronomical amount for. Netflix's best hope is for a flash in the pan reaction to its new movies and shows. Disney's content creates a flywheel effect which should make for a more loyal customer base and therefore keep churn down. Disney's streaming package, referred to as the Disney bundle — Disney+ with Hulu with ads and ESPN+ —is a better value than the standard Netflix plan. Not only is the Disney bundle at a lower price point — $14 per month for Netflix at $15.99 — but you also get a unique, must-own sports-centric service that every rabid fan should subscribe to get an edge in their fantasy leagues. ESPN is still scratching the surface in gambling. In short, the success of ESPN+ has completely changed ESPN's narrative. Next, let's go back to the fact that with DIS trading at around $125 per share Wednesday morning, the stock has nearly washed away all its gains from the April 11, 2019 Investor Day, where management first laid out its direct-to-consumer (DTC) strategy. Disney shares closed at $130.06 on April 12, 2019, the day after the event, so at $125 per share Wednesday morning, we can argue that you are getting Disney's successful pivot to DTC for free. Also keep in mind that Disney+ is still launching in so many new markets, whereas Netflix is pretty much available everywhere except China. This long list of where Disney+ will soon become available will naturally support growth over the next couple of quarters. Touching on the noise right now between Republican Florida Gov. Ron DeSantis and Disney, we believe this is just that — noise — and will not result in an impact to earnings per share. Finally, the profit engine of the company: Disney's theme parks have never operated this well in company history with margins as high as they ever have been. A ticket to the Florida parks has become one of the hottest tickets in town, and attendance is at its limit despite the full return of international visitors. Disney's park numbers speak to the power of Disney's franchises and the flywheel effect. In short, we believe the makeup of Disney's streaming strategy is different from Netflix's and has the potential to be much more powerful. Its focus on franchises, world-building, and unmatched storytelling is the differentiator and enabler of a stronger customer base. With shares down aggressively in sympathy to Netflix's subscriber losses, we believe Wednesday's pullback represents a long-term buying opportunity. (Jim Cramer's Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Bob Chapek, Disney CEO at the Boston College Chief Executives Club, November 15, 2021.

Charles Krupa | AP