Why Did Disney (DIS) Fall After Netflix's (NFLX) Earnings?

Streaming giant Netflix, Inc.'s (NFLX) recent earnings disappointed investors. Its stock fell into a swoon upon reports of a slowdown in subscriber growth, weak guidance, and choppy growth numbers ahead. One would think that shares of The Walt Disney Company (DIS), which has a competing streaming service in Disney Plus, would benefit from a slide in its competitor's stock. That did not happen. 

Instead, the House of Mouse also registered a 6% decline in its share price. The slide continued on the morning of Monday, Jan. 24, and Disney's shares fell to a 52-week low of $129.31 before recovering. Investor worries about a performance decline for Disney Plus is understandable, given that the streaming service has become an increasingly important of its parent company's balance sheet.

But their fears may be unfounded. While its streaming service may witness subscriber growth hiccups in the short term, Disney's deep reservoir of content should ensure that its long-term growth prospects remain intact.

Will Disney Plus Go the Netflix Route? 

One of the reasons attributed being attributed to the slowdown in Netflix's subscriber growth is content. The streaming service racked up subscriber gains in wake of the success of Squid Game—a South Korean survival drama that became a smash hit. Its popularity is part of Netflix's thesis that original content will draw viewers to the service. In recent years, as it expanded across geographies, the company has upped its spending on content to attract more subscribers to its platform.

That thesis is being challenged by this quarter's results. Even though the service offered up its usual fare of original content, there were no breakout shows, and subscriber growth was weak. "You don't know the next Squid Game," explained Michael Nathanson, analyst with MoffettNathanson, to CNBC.

Disney has also committed to massive spending on content for its streaming service and is focused on producing original content. The similarity in strategy might make it susceptible to the same risks as Netflix, searching for hit shows to attract and retain users for its platform.

But that argument does not consider Disney's history in producing quality content. Disney Plus has one of the lowest subscriber churn rates among streaming services. This might be, in large part, due to its content library.

Over the years, the company has built up a valuable franchise that it can rely on to reliably churn out hits and bring viewers to its offerings. This franchise includes cartoon favorites like Mickey Mouse, Pixar characters, and sci-fi adventures from the Marvel universe. It can repurpose these franchises to suit its streaming offerings. The Mandalorian, a spinoff from Marvel's Star Wars universe, is an example. The series premiered on Disney Plus in 2019. It became a hit and spawned a market for Baby Yoda toys. 

That said, the streaming service is not immune to weak subscriber growth. Just last quarter, Disney's shares tanked due to a slowdown in growth numbers. CEO Bob Chapek has also warned that the company's route to its target of between 230 million and 260 million subscribers will not be linear, meaning that investors can expect further weak growth quarters ahead.