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2 No-Brainer Stocks to Buy in the Entertainment Industry

Daniel B. Kline, The Motley Fool

If for no other reason than the fickle nature of popular taste, even the entertainment industry's strongest companies will have their ups and downs. A studio might produce a whole roster of hits one year, then strike out on virtually everything it releases the next.

That's why the true no-brainer stocks to buy in the space belong to a pair of companies that have managed to mostly eliminate such volatility. Both Netflix (NASDAQ: NFLX) and Walt Disney (NYSE: DIS) have built models designed to succeed year after year. Yes, each still needs to generate fresh blockbusters, but they've also built systems that make creating them easier, and exploiting them simpler.

The Netflix home screen

Netflix's content library has helped it build a huge subscriber base. Image source: Netflix.

What has Netflix built?

The streaming leader has surpassed the 130 million subscriber mark, and well over half of those viewers (73.46 million) live outside of the United States. It has done that by in large measure by building out a massive library of original content, which both helps it attract new customers and serves as major competitive moat defending it against most would-be rivals.

Netflix also has perfected the formula for creating its own sort of hits. It doesn't necessarily need its shows or movies to win critical acclaim or even score a traditional mass audience (though they frequently do). Instead, it needs enough content to keep fans in an array of niches from leaving.

That's why it's putting hundreds of millions of dollars into making Adam Sandler movies. The man-child comedian may no longer have what it takes to drive box office success, but his brand of humor appeals to a surprisingly large group of Netflix customers, and that makes his movies "hits," no matter how much critics hate them. (And boy, do they hate them.)

How has Disney done it?

Disney, too, has built a moat around its business with intellectual property: The company has taken much of the uncertainty out of the movie business by nurturing a stable of nearly sure-fire hit properties. Most of its film release schedule is filled with such franchises -- Marvel, Pixar, Disney Animation, "Star Wars," and others -- which makes its returns much more predictable than a traditional movie studio.

That army of brands and characters also supports Disney' theme park, licensing, and television businesses. Essentially, the Mouse House does most of it work with known properties -- whether its core animated characters, which have won over generations of little kids, or the comic book and sci-fi properties whose appeal ranges among all ages.

And as the television/cable landscape evolves further (thanks in large part to Netflix and its streaming peers), all of that intellectual property will cushion Disney against the shocks. Its cable channels remain strong, but any weakness that develops there likely will be compensated for by the company's still-in-development entertainment-based streaming service, which will be chock-full of Marvel, Star Wars, and other Disney-owned brands.

Hard to compete

Both Disney and Netflix have built businesses that are very hard to compete with. No company has an IP lineup that rivals the one Disney has built -- only Comcast comes close, and it's a distant second. Netflix has a first-mover advantage around the world in streaming, and a huge library that makes it impossible for most rivals to compete.

In fact, Disney may be Netflix's only real challenger in streaming, and it's likely the two will mostly take market share from cable and other streaming services, as opposed to doing much harm to each other. It's easy to picture consumers joining Disney's streaming service after it launches, but it's hard to picture a scenario where many of them add it as a replacement for Netflix. Instead, the Disney streaming launch should inspire more people to cut the cord on traditional pay-TV -- which might actually create increased demand for Netflix.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.