How Streaming Services Netflix, Disney And Spotify Stack Up

In this article I use AAII’s A+ Investor Stock Grades to provide insight into three streaming service stocks. With consumers ditching television providers and the radio at record numbers, should you consider streaming service stocks such as Walt Disney
DIS
, Netflix
NFLX
and Spotify Technology SA (SPOT)?

Streaming Service Stocks Recent News

Video streaming services allow users to watch movies and TV whenever and wherever they desire. Americans are dropping traditional cable and satellite TV services faster than ever in favor of digital streaming services. The global video streaming market was valued at $455.45 billion in 2022 and is projected to grow to $1,902.68 billion by 2030. The increased use of social media platforms and wider access to the internet have been primary drivers of the growth of the global video streaming market. In addition, the coronavirus pandemic significantly accelerated the adoption of online live-streaming services, greatly increasing the size of the market. Streaming accounts for 38% of all TV usage, with approximately 1.8 billion current subscriptions to video streaming services.

In the realm of audio, long gone are the times of needing an iPod or MP3 player to listen to music on the go. Smartphones and the rise of digital music streaming have made listening to your favorite songs easier than ever. The largest music streaming services, Spotify and Apple
AAPL
Music, each have over 50 million songs available to subscribers who pay a small monthly fee. Many of these platforms also allow users to listen to podcasts and audiobooks.

In 2015, 52% of U.S. households had at least one streaming service subscription. Currently, 83% of households have at least one streaming service subscription. The advancement and adoption of new technologies allow consumers to use more digital media and audio content than ever before. This, along with somewhat affordable pricing, provides opportunities for streaming services.

Grading Streaming Service Stocks With AAII’s A+ Stock Grades

When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three streaming service stocks—Disney, Netflix and Spotify—based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three Streaming Service Stocks

What the A+ Stock Grades Reveal

Walt Disney Co. (DIS) is a worldwide entertainment company. Its segments include Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP). The DMED segment encompasses the company’s global film and episodic television content production and distribution activities. The DMED lines of business consist of linear networks, direct-to-consumer and content sales/licensing. The DPEP segment business consists of theme parks admission fees; food, beverage and merchandise sales at its theme parks and resorts; sales of cruise vacations; sales and rentals of vacation club properties; royalties from licensing its intellectual properties (IP) for use on consumer goods; and the sale of branded merchandise. The content sales/licensing business consists of selling film and episodic television content in the television and subscription video-on-demand (TV/SVOD) and home entertainment markets.

Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Disney has an Earnings Estimate Revisions Grade of D, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.

Disney reported a positive earnings surprise of 8.1% for the third fiscal quarter ending in June 2023, and in the prior quarter it reported a negative earnings surprise of 0.1%. Over the last month, the consensus estimate for Disney’s fiscal fourth quarter has decreased from $0.744 to $0.701 per share due to three upward and 11 downward revisions. Over the last month, the consensus estimate for fiscal 2023 has decreased 1.1% from $3.706 to $3.662 per share, based on 12 downward revisions.

Disney has a Momentum Grade of C, based on its Momentum Score of 45. This means that it is average in terms of its weighted relative price strength over the last four quarters. This score is derived from an above-average relative price strength of –5.8% in the most recent quarter, –10.0% in the third-most-recent quarter and 2.9% in the fourth-most-recent quarter, offset by below-average relative price strength of –16.1% in the second-most-recent quarter. The scores are 58, 30, 54 and 61, sequentially from the most recent quarter.

The weighted four-quarter relative price strength is –7.0%, which translates to a rank of 45. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%.

The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and longer-term annualized basis and its ability to consistently generate positive cash from its core operations. Disney has a Growth Grade of A, based on its score of 90. Disney’s five-year average annual sales growth rate is 8.5%, well above the sector median of 6.0%, which translates to a percentile rank of 87. Profits have increased in four out of the last five years, in the 66th percentile. Additionally, Disney has generated positive annual cash from operations in five out of the past five fiscal years, translating to a rank of 64. The sum of all three scores is 217, which ranks in the 90th percentile among all U.S.-listed stocks.

Netflix (NFLX) is an entertainment services company. The company has paid streaming memberships in over 190 countries, and it allows members to watch a variety of television series, documentaries, feature films and mobile games across a variety of genres and languages. Members can watch as much as they want at any time. Additionally, the company offers a variety of streaming membership plans, the price of which varies by country and the features of the plan. The pricing of its plans ranges from approximately $7 to $23 per month. Members can watch streaming content through a host of internet-connected devices, including TVs, digital video players, TV set-top boxes and mobile devices. The company acquires, licenses and produces content, including original programming.

Netflix has a Growth Grade of B, with a Growth Score of 73, which is strong.

The company’s Momentum Grade is A, based on its Momentum Score of 89. This means it has a very strong weighted relative price strength over the last four quarters. The Momentum Score is derived from above-average relative price strength in three of the four most recent quarters, offset by a lower relative price strength of –9.0% in the third-most-recent quarter. The scores are 77, 86, 56 and 89, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 9.5%, which translates to a very strong rank of 89.

A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.

Netflix has a Quality Grade of A, with a Quality Score of 93. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

The company ranks strongly in terms of its return on assets, return on invested capital and F-Score. Netflix has a return on invested capital of 79.1%, compared to the sector median of 19.0%. Its return on assets of 9.1%, above the sector median of –5.6%, also ranks highly. Its F-Score of 7 is also strong compared to the sector median of 4. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.

Spotify Technology SA (SPOT) is a Luxembourg-based company that offers digital music streaming services. The company enables users to discover new releases, playlists and millions of songs so that users can play their favorites, discover new tracks and build a personalized collection. Users can either select Spotify Free, which includes only shuffle play, or Spotify Premium, which encompasses a range of features, such as shuffle play, no ads, unlimited skips, offline listening, ability to play any track and high-quality audio. The company operates through a number of subsidiaries, including Spotify Ltd., and is present in over 20 countries.

Spotify has a Value Grade of F, based on its Value Score of 9, which is considered ultra-expensive. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). Spotify has a high price-to-book ratio of 14.07 and an extremely high price-to-free-cash-flow ratio of 150.9, ranking in the 95th and 96th percentiles, respectively.

Spotify’s Growth Grade is A, based on a Growth Score of 82, which is very strong. The company has a five-year annualized sales growth rate of 23.5%, ranking in the 48th percentile but well above the sector median of 9.5%. Spotify has also seen year-over-year sales increases in each of the past five years, as well as positive cash from operations in each of the past five years.

Spotify has a Momentum Grade of A, based on its Momentum Score of 96, which is very strong. The stock has had impressive relative price strength in three of its past four quarters, with the most recent and fourth-most-recent quarters being the most impressive at 23.9% and 55.7%, respectively. The scores are 94, 32, 91 and 95, sequentially from the most recent quarter. Its weighted four-quarter relative price strength is 21.6%, ranking in the 96th percentile of all U.S. stocks.

Spotify has an Earnings Estimate Revisions Grade of B, based on its score of 70, which is positive. The stock’s consensus estimate for fiscal-year 2023 has been revised upward over the last month by 30.3%, ranking in the 97th percentile.

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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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