What Netflix's earnings beat tells us about Club holding Disney

Published Wed, Oct 19 20223:46 PM EDTUpdated Wed, Oct 19 20223:58 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Investors in Club holding Disney (DIS) appear to have been encouraged by streaming competitor Netflix 's (NFLX) better-than-expected third-quarter results Wednesday — a sentiment that's not misguided, but requires some context. Disney shares were outperforming the broader market Wednesday, rising about 0.7%, to roughly $99 per share, while the S & P 500 lost 0.8% in midday trading. Disney's uptick came as Netflix surged more than 12% on the back of strong subscriber additions, breaking a consecutive two-quarter streak in which it lost paying customers, while beating estimates on revenue and profit. Subscriber growth We think Netflix's quarter offers a positive read-through for Disney on the streaming front. That's important, even though we've argued for months that Wall Street's intense focus on Disney's streaming ambitions means the company's booming theme park business gets somewhat overlooked. In the first six months of the year, Netflix lost more than 1 million subscribers combined and saw many investors head for the exit, too. On Tuesday night, however, Netflix reported it gained 2.41 million subscribers globally in the three months ended Sept. 30. Netflix management intends to deemphasize subscriber growth as a metric now that an ad-supported version of the streaming platform is on the horizon, as well as a paid password sharing product. Nevertheless, some on Wall Street were encouraged to see Netflix return to subscriber growth in the third quarter, suggesting the storm clouds could be dissipating. "The dark days are over. If there's a unifying narrative for NFLX in 3Q22 it's that the worst appears behind it," Wells Fargo analyst Steven Cahall wrote in a research note Tuesday. In general, Netflix and Disney are very different companies — a point we drove home in July when Netflix reported second-quarter results . In simple terms, Disney is an expert at creating beloved fictional worlds then monetizing these iconic franchises through movies and shows, theme-park attractions and merchandise. Netflix, by contrast, is solely focused on making moves and TV shows to stream. When it comes to streaming, Netflix is considerably more mature, having first launched basic digital streaming in 2007 before scaling up and starting to make its own shows . Netflix brought its streaming service to over 130 countries across the world more than three years before Disney's flagship streaming service, Disney+, hit the U.S. and Canadian markets in the fall of 2019. Disney is still expanding into new countries , serving as a natural well for subscriber growth, which for Netflix has largely dried up. Disney+ added a combined 22.3 million subscribers in its two most-recent quarters , which coincided with Netflix's period of paid customer losses. That informs why we view Netflix's fresh subscriber gains as positive for Disney. Even in a period of decline for Netflix, Disney+ was able to keep growing solidly. Now, Netflix's turnaround with subscribers could suggest the overall streaming environment has become more favorable, giving Disney an even stronger tailwind. Disney's fiscal fourth-quarter and 2022 annual results are slated to be released after the market closes Nov. 8. Analysts expect the company to have added 9.1 million Disney+ subscribers in its fourth quarter, according to FactSet. Ad versions Another big topic around Netflix's earnings report is its upcoming advertising-supported tier , which debuts early next month in 12 countries including the U.S., Canada and Japan. In the U.S. it will be $6.99 per month starting Nov. 3 . This is noteworthy for Disney because an ad-supported version of Disney+ is set to launch Dec. 8 in the U.S., costing $7.99 per month. Disney+ without ads currently costs $7.99, as well. However, it will rise to $10.99 monthly once the ad-supported tier is live. Netflix management sounded upbeat about the impending launch, with Chief Operating Officer Gregory Peters saying Wednesday demand from advertisers is "very, very strong." Peters also noted how quickly Netflix's ad-supported product came together, partnering with Microsoft to deliver it in about six months. While Netflix's ad tier will beat Disney+ to the U.S. market by about a month, we're generally optimistic about Disney's ability to compete in the digital advertising space. This is primarily because Disney is deeply entrenched in the advertising world both on linear TV — through its ownership of ESPN and other cable channels — as well as through its majority stake in Hulu, a streaming service that has long offered plans with ads. Netflix had for years resisted calls to bring advertising to its service before publicly changing its tune this past spring. Amid a the current economic slowdown, it's generally encouraging to hear advertisers are interested in Netflix's offering. We just happen to think Disney occupies a superior position in the race for streaming ad dollars heading into next year. Rosenblatt Securities analyst Barton Crockett offered a similar view in a CNBC interview Wednesday. "Disney, I think, is going to trounce Netflix in eyeballs for [subscription video on-demand] advertising. Disney will be the better ad story, we think, in 2023 than Netflix," Crockett told CNBC. (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. 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An inflatable Disney+ logo is pictured at a press event ahead of launching a streaming service in the Middle East and North Africa, at Dubai Opera in Dubai, United Arab Emirates, on June 7, 2022.

Yousef Saba | Reuter