Streaming is the future of television, and many major players are entering that industry that is, so far, being dominated by Netflix (NFLX). Disney (DIS) and AT&T (T) have been rolling out their respective streaming services in the recent past, and demand for both has been better than expected. The market’s reaction, however, has been very different, and shares of Disney and AT&T have not fared the same at all. In this article, we’ll try to find out why, and decide which is a good value at current prices.
The Streaming Wars
Netflix is the global leader in streaming subscriptions, but large companies with deep pockets have been moving into that market, seeking to get their share of the pie. That includes Amazon (AMZN), a natural competitor since Amazon tries to be active in more or less anything related to online consumer businesses. Apart from Amazon, Disney and AT&T are recent market entrants, with Disney+ and HBO Max.
Looking at subscriber numbers at the end of the third quarter, we get the following picture:
|Amazon Prime Video||150 million|
|HBO Max||9 million|
Source: Forbes, chart by author
Netflix and Amazon clearly still dominate, but Disney’s streaming service has become a large business as well. This is despite the fact that the service only launched in November 2019, whereas its two biggest competitors have rolled out their services 9 years ago and 13 years ago, respectively. Disney has hit the 70 million subscriber mark much sooner than expected, originally, that was the target for fiscal 2024. HBO Max, on the other hand, has so far gathered 9 million subscribers, although it should be noted that the number, when combined with HBO, is 57 million. Hulu, majority-owned by Disney, has 33 million subscribers, which isn’t really too much considering the low pricing (starting from $5.99 per month) and the fact that Hulu is available in 2007. The fact that Hulu has, over 13 years, garnered less than half the subscribers that Disney+ has garnered in one year makes Hulu seem like a relatively irrelevant player in this industry. Due to the lowish price most streaming services are available at, it seems reasonable to assume that many households will eventually have subscriptions to more than one service. This is thus not a winner-takes-it-all market, but scale does still matter. So does a deep content library, and on that front, both AT&T and Disney seem to be well-positioned, despite lower subscriber numbers compared to Netflix and Amazon.
Disney Versus AT&T During This Crisis
When we look at the share price and enterprise value performance during the current crisis, the picture is very different for AT&T and Disney:
AT&T’s enterprise value has declined by 14% during 2020, to $388 billion, while Disney’s enterprise value has risen by 20% this year, to $364 billion. Going into this year, AT&T’s enterprise value was $148 billion higher than that of Disney, while the difference has declined to just $24 billion right now. Overall, the EV differential has thus shrunken by a whopping $124 billion so far this year. When we look at the underlying results of the two companies, that is not what one would expect:
AT&T clearly outperformed Disney in terms of cash generation, both before and after capital expenditures, while AT&T also remained profitable easily. Disney, at the same time, recorded net losses on a trailing twelve months basis.
AT&T has felt some pressure from the pandemic, which includes a hit to its cinema business (Tenet, Wonder Woman 1984). The impact was much larger for Disney, however, as Disney is more dependent on its box office revenues. On top of that, Disney is also feeling the impact of lockdowns on its vast entertainment park business.
The fact that Disney’s shares outperformed AT&T’s shares so easily over the last year can thus not be explained by the results the two companies generated so far this year, as AT&T clearly looks stronger on that basis. Instead, I believe, the vast outperformance from Disney’s stock can be explained by the market’s very different view when it comes to the streaming services of the two companies.
Disney recently saw its shares jump by double-digits, adding about $30 billion in market capitalization in one day, following the investor’s day on which management talked a lot about Disney+. Disney+ is not profitable yet, and operating losses for the unit will grow during 2021, and yet the market is ascribing a large value to the business unit. Right now, Disney+ is generating revenues of somewhere around $6 billion to $9 billion a year, depending on the rate of annual subscriptions versus monthly subscriptions, and factoring in promotional plans. This is roughly 10% of Disney’s total revenue basis. And yet, the market clearly sees immense value in this non-profitable business unit that is generating around 10% of company-wide revenues. This can, I believe, be explained by the fact that management was able to craft a story around the service, its vision for it, plans to entice dozens of millions of new customers each year, etc. This has turned Disney from a linear-TV-focused, “old media” company into a techy, high-growth subscription service stock in the eye of the market. The market has thus started to value Disney like other tech stocks, growth stocks, and streaming stocks:
Disney is trading at a higher EV/sales multiple than Amazon, while its forward EV to EBITDA multiple is also on par with that of Amazon. Netflix trades at a higher valuation still, but the difference between its valuation and that of Disney has declined in the recent past.
AT&T, meanwhile, has not been able to do the same. Management has not been able to convince investors that HBO Max has potential and that AT&T will become a major streaming player. There is no clear vision, ambitious goals for the service a couple of years down the road, etc. AT&T has thus, surprisingly, not seen a similar re-rating in the way the market values the stock this year. Instead, AT&T continues to trade at a very inexpensive 7.0 times 2021’s EBITDA estimates, or about one-third of the valuation Disney trades at.
What This Means For Investors
Clearly, for someone investing money one year ago, the outcome with a Disney investment was superior. Those that bought Disney in the past have benefited from the positive sentiment change and were rewarded by ample share price gains, despite the fact that Disney’s profits and cash flows have fallen off a cliff. For those that bought AT&T one year ago, returns have not been great, despite the fact that AT&T has performed much better during this crisis on an operational basis.
This does, however, not mean that the story will be the same over the coming years. Disney is already trading with a valuation that is on par with that of Amazon, an e-commerce/tech pureplay with a dominant market position. A further increase in valuation seems not very likely, I believe.
AT&T, meanwhile, is still trading at a bargain valuation while making solid strategic moves such as paying down debt, selling non-core assets, and undoing mistakes from the past. If management is able to deliver when it comes to HBO Max, and when they can convince the market that HBO Max is a viable competitor in the streaming industry, then AT&T could see a re-rating. Its valuation will, I believe, never come close to that of Amazon, as AT&T is too dependent on low-growth businesses such as wireless and cable. But if sentiment around HBO Max changes, even an expansion in its EV to EBITDA ratio to 8 or 9 would lead to ample share price gains. On a relative basis, upside potential for AT&T thus seems less limited compared to Disney, which already looks fully valued at current prices. AT&T, on the other hand, has an upside potential of 20% just to its pre-crisis levels, taking out a new all-time high wouldn’t even be necessary for that.
Disney+ has had surprising success in its first year, as subscription numbers have grown much higher than estimated. The outlook for the service remains strong. But on the other hand, Disney+ is not profitable, and management believes that it will only become profitable in 2024. Still, the market has rewarded Disney very handsomely for its success with Disney+ and has sent its valuation upwards.
AT&T has not had the same success so far, but the company has a deep content library as well. If management is able to steer the company in the right direction with HBO Max, and if management can convince the market that it is able to do so, AT&T may see a positive change in sentiment as well.
Right now, Disney’s execution is better, but its shares are already fully priced, I believe. There doesn’t seem to be a lot of upside potential. AT&T, on the other hand, is trading at a very low valuation and has considerable upside potential, Even just a reversal back to pre-crisis levels would send shares up by 20%, and if its streaming service gains traction, more gains could be coming. Factoring in that AT&T also offers a 6.7% dividend yield and that its business has been quite resilient during this crisis, AT&T looks like the better pick right here, with valuation being the key differentiator versus Disney.
One Last Word
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