Entertainment has been a growing part of the economic pie for decades. With so many different options and the Cambrian Explosion that came along with the internet, billions of people have an unlimited supply of content to explore at their fingertips. Two companies have separated from the pack over the past few decades Disney (DIS 1.30%) And the Nintendo (NTDOY 1.28%). Both have built great relationships with their customers through popular brands and franchises like Mario, Zelda, Pixar, and Marvel.
But which recreational stock is best in your portfolio? Here are four ways to compare Disney vs Nintendo that can show investors which stocks are the best buys today.
1. Industry tailwind
While Nintendo and Disney overlap by offering family entertainment options, they’re doing it in very different ways right now. For Nintendo, it sells interactive video game consoles and family video games such as Mario Kart. Disney focuses on movies and television as the main way it interacts with its customers.
Disney, after making a successful turnaround a few years ago, is now one of the leading video streaming companies around the world along with competitors like Netflix. The streaming industry’s revenue is expected to grow 11% annually through 2027 and reach $139 billion in annual spending. As one of the leaders in the space, Disney should take advantage of this tailwind as the majority of the video entertainment market is shifting to online streaming.
The streaming video tailwind should help Disney grow, but the video game market presents an even bigger opportunity in the long run. Worldwide, spending on video games is estimated to be just under $200 billion annually and is projected to approach $300 billion by 2025. Clearly, more people (especially young people) want to spend their money on interactive entertainment rather than experiences Negativity like TV and movies.
2. Expansion beyond the core business
As many of you know, games and TV shows aren’t the only way the two entertainment giants interact with customers. Historically, Disney has been more successful in expanding outside of its core business. Just look at how popular theme parks are with kids and their families. The company’s theme parks and consumer products segment generated $28.7 billion in revenue last year and had operating income of $7.9 billion.
Nintendo has historically stayed more in its core gaming business, but has recently made some investments to become more Disney-like with its entertainment options. For example, it’s opening four theme parks with Universal around the world, it’s building mobile apps through a Niantic partnership, and it has a Mario movie coming out in 2023. These endeavors are nowhere near the scale of Disney, but they certainly have the potential to grow their brands. Nintendo commercial this decade.
From an investor’s perspective, Disney is clearly winning with its diversified strategy. But Nintendo is trying hard to catch up.
3. The balance sheet
Looking financially, Nintendo and Disney couldn’t be more different. Disney has over $48 billion in debt and $11.6 billion in cash on its balance sheet, while Nintendo has zero debt and a cash position of $11.4 billion. Disney should have no problem paying that debt back, but it does leave the company in an even more precarious financial position if any of its sectors do poorly. Nintendo, on the other hand, can weather many years of poor performance with how conservative its balance sheet is.
As of this writing, Disney has a market capitalization of $164 billion, while Nintendo has a market capitalization of $47 billion. If we add the debt back in and subtract the cash from their balance sheets, the enterprise value (EV) of Disney would rise to $200 billion and Nintendo would drop to $35.6 billion.
In its most recent full fiscal year, Nintendo had net income of $3.37 billion. Disney did only slightly better with net income of $3.55 billion, giving Nintendo stock a much cheaper EV-to-earnings ratio of 10.5 versus Disney at 56. That’s a big difference and one that investors shouldn’t take lightly when considering a stock to buy now.
Although Disney has a more diversified business, I think Nintendo could be a much better investment in the future because of its valuation, healthy balance sheet, and huge long-term potential for the video game market.
Brett Schafer has positions at Nintendo. The Motley Fool has and recommends positions at Netflix and Walt Disney. The Motley Fool recommends Nintendo and recommends the following options: January 2024 long calls of $145 on Walt Disney and January 2024 short calls of $155 on Walt Disney. The Motley Fool has a disclosure policy.