Buy Better: Nintendo vs. Disney Stock

Entertainment has been a growing part of the economic pie for decades. With a multitude of different options out there and the Cambrian explosion that came with the internet, billions of people have a limitless supply of content to explore at their fingertips. Two companies that have stood out from the crowd over the past few decades are Disney (DIS 0.99%) and Nintendo (NTDOY 1.68%). Both have built fantastic relationships with their customers through renowned brands and franchises such as Mario, Zelda, Pixar and Marvel.

But which entertainment stock is better to have in your portfolio? Here are four ways to compare Disney and Nintendo that can show investors which stock is the better buy today.

1. Industry tailwind

While both Nintendo and Disney overlap in offering family entertainment options, they currently do so in vastly different ways. For Nintendo, it sells interactive video game hardware and family-style video games like Mario Kart. Disney focuses on movies and television as the primary way it interacts with its customers.

Having made a successful transition a few years ago, Disney is today along with competitors such as one of the leading video streaming companies around the world Netflix. Streaming industry revenue is projected to grow 11% per year through 2027, reaching $139 billion in annual spend. As one of the leaders in this space, Disney should benefit from this tailwind as most of the video entertainment market moves to internet streaming.

The tailwind from streaming video should help Disney grow, but the video game market offers a bigger long-term opportunity. Global video gaming spending is estimated at just under $200 billion per year and is projected to grow to almost $300 billion by 2025. Obviously, more and more people (especially young people) want to spend their money on interactive entertainment rather than passive experiences like television and movies.

2. Expansion outside of the core business

As many of you know, games and TV shows aren’t the only way these two entertainment giants interact with customers. If we look back, Disney has been far more successful at expanding outside of its core business. Just look at how popular the theme parks are with children and their families. The company’s theme parks and consumer products segment had sales of $28.7 billion and operating income of $7.9 billion last year.

Nintendo has historically tended to stick to 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, developing mobile apps through a Niantic partnership, and has a Mario movie coming out in 2023. This effort isn’t nearly as big as Disney’s, but definitely has the potential to grow Nintendo’s brands this decade.

From an investor perspective, Disney clearly wins with its diversified strategy. But Nintendo is trying hard to catch up.

3. Balance sheet

Financially, Nintendo and Disney couldn’t be any different. Disney has over $48 billion in debt and $11.6 billion in cash on its balance sheet, while Nintendo has no debt and a cash position of $11.4 billion. Disney shouldn’t have a problem paying off that debt, but it puts the company in a more precarious financial position if any of its segments post poor results. Nintendo, on the other hand, can survive many years of poor performance given how conservative its balance sheet looks.

4. Rating

As of this writing, Disney has a market cap of $164 billion and Nintendo has a market cap of $47 billion. If we count back debt and subtract cash from both balance sheets, Disney’s enterprise value (EV) increases to $200 billion and Nintendo’s to $35.6 billion.

In the last full fiscal year, Nintendo generated net income of $3.37 billion. Disney fared only slightly better with net income of $3.55 billion, giving Nintendo stock a significantly cheaper EV earnings ratio of 10.5 versus Disney’s 56 buy outright.

Even though Disney has a more diversified business, I think Nintendo can be a much better investment going forward given its valuation, healthy balance sheet, and the massive long-term potential of the video game market.

Brett Schafer has positions at Nintendo. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Nintendo and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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