In August of 2018, I penned my first article on Seeking Alpha aptly titled "Netflix: A Sell on Disney News" discussing the competitive threat to Netflix (NFLX) after Disney (DIS) announced the finalization of its deal to acquire Fox (FOXA). Not only would this give Disney one of the biggest content libraries of proven and established IPs of any media company in history, but it makes Disney the 60% majority shareholder in one of Netflix's top rivals, Hulu. At the time, I was one of the few voices discussing this concern, particularly the threat of a mass exodus of content from Netflix to Disney+ and Hulu, but this sentiment was later picked up by the mainstream media, especially after Disney confirmed it would be pulling content from the platform in 2019. These concerns reached a fever pitch following the recent Disney analyst event, in which the company announced its content lineup and pricing structure (which is half of Netflix). That being said, my concerns were primarily driven by a slowdown in user growth, which the company has since largely explained, and I, as well as most Wall Street analysts, seem to believe these concerns are a bit late and based on half-baked investment theses.
Competitive Landscape And What Matters
At A Glance
Netflix is the clear industry leader in the streaming entertainment media space, having benefitted significantly from its status as an early disruptor with Amazon (AMZN) and Hulu coming in second and third. Other key players of note include Roku (ROKU) with its Roku channel, HBO with its HBO go platform, and Alphabet (GOOGL) (GOOG) with YouTube Premium. Forthcoming players include Apple (AAPL) with its recently announced subscription-based streaming platform, Disney (the primary subject of this note) and AT&T (T) with their expected Time Warner streaming platform. There are many more streaming services on the market from other media companies, but most of these are not a threat as they do not have the capability to host an international service and are limited to the US alone. Netflix has acknowledged this and actually financed content for these services, which was the case with season 1 of Star Trek Discovery for CBS (CBS) All-Access. In exchange for the rights to distribute the show exclusively in international markets, Netflix helped finance the flagship title for its domestic "competitor." With that out of the way, I want to address each of these companies briefly and why I do, or not, think they are a threat to Netflix at this given time.
Amazon Prime Video
Jim Cramer notoriously refers to Amazon as "The Death Star" because it tends to dominate any market that it enters. Blue Apron (APRN) for example, suffered a tremendous loss of goodwill as soon as Amazon announced it would purchase Whole Foods. While Prime is best known for the benefit of free two-day shipping, it has a robust streaming library and it has had a historically better relationship with the traditional Hollywood industry than Netflix, which has helped it gain award consideration. I am very bullish on the future of Amazon as a whole, but the company has yet to usurp Netflix in terms of prominence and I don't see this happening in the near future, even with the upcoming Lord of the Rings series. In my view, people buy prime for the shipping benefits and convenience and view the streaming service as a high-quality perk, and I don't think this will change.
The Roku platform, in its current form, is largely just hardware and an alternative to an Amazon Firestick or an Apple TV unit. The service is very popular amongst cord cutters, but I have not heard much of any buzz of its proprietary channel or service. Most find value in its large library of applications and view Roku as a means to an end to view content from other providers. For this reason, I view it as a relative non-threat.
HBO is probably closest to Netflix in terms of audience appeal and content type. The cable provider is known for its edgy mature content featuring graphic violence, nudity, and explicit language. It is also known, like Netflix, for critical acclaim and for producing pop-cultural staples, such as Game of Thrones. Much like Amazon though, this has largely been treated as a compliment to a Netflix subscription, rather than a substitute. It has not proven itself to be a threat thus far, and again, I do not foresee this changing on its current course.
YouTube Premium & YouTube TV
One of the worst arguments I repeatedly hear about streaming is the idea that a company just needs "enough money" to be successful, to which I direct them to YouTube Premium. Alphabet has more than enough assets to cover the costs of a streaming service and it hasn't cut many corners. After an initial attempt to turn its YouTube stars into streaming talent, it has since started producing a fair amount of scripted content, including Cobra Kai, which is based on an existing and popular IP, stars the original Hollywood cast members and received critical acclaim. Since then, however, the company has announced it is cutting back on scripted content, which is a clear sign that you can't just count on money to bring subscribers. YouTube TV, on the other hand, is a monthly service offering live TV channels, similar to a service offered by Hulu (see Disney section), but in my view, this competes more with traditional cable and other alternatives, rather than Netflix.
Apple is the company I am least worried about in terms of the competitive landscape, at least it is in its current form. The company announced a streaming service with content from JJ Abram's, Jason Mamoa, Oprah, as well as other Hollywood A-Listers, in a bid to compete in the streaming space. While I am very bullish on the company's media bundle, and Apple, on the whole, I do not feel this is a serious contender as the company has no proven IP right now. Sure it has the resources to compete, but so does Google, and without that coveted IP to draw subscribers in, I don't see adoption being instantaneous.
Time Warner (AT&T)
AT&T has already dealt Netflix's share prices a blow since it announced it would pull the hit series "Friends" causing the streaming giant to negotiate a massive payout to keep the content through 2019. I do not care where on the argument you stand, to me, this $100 MM payout was not a positive for the company and conveys weakness. While AT&T does not have as extensive of a library as Disney, it holds a number of important and valuable IPs including DC comics, Harry Potter, and the original Lord of the Rings and The Hobbit trilogies. These popular IPs combined with crowd-pleasing classics like Friends is more than enough of a draw to warrant obsessive fan subscriptions and free trials, if nothing else, and will draw eyes to whatever other content it has to offer. Even if T decides to split up its content over several smaller platforms, similar to its DC Universe streaming service, it would at minimum cause a headache and boost the price Netflix has to pay for syndicated content.
Disney (Disney+, ESPN+, Hulu 60%)
Disney's ownership of Hulu alone makes it the biggest competitor of the upcoming names in and of itself, and Iger has expressed interest in purchasing the whole thing. You add in ESPN and its proprietary platform, and you have an instant powerhouse. Disney owns so much valuable IP it is hard to quantify in words. Last year Disney earned around $4 billion from Marvel alone with only three films. Star Wars, under Disney, has also grossed over $4 billion since 2015 in only 4 films. This year, Disney has already earned over $1 billion from Captain Marvel alone and Avengers Endgame has broken pre-sale records (previously held by its other property, Star Wars). You add in its full library of animated classics at half the price of Netflix, and you have a very attractive package to the general consumer in and of itself. Disney is not stopping there, it also has promised Marvel and Star Wars TV shows starring the Hollywood talent from the films themselves, and with theatrical levels of production quality. Additionally, Disney now owns the Fox library of content including Family Guy and the Simpsons. While these might not have a place on Disney+, you can bet they'll all end up on Hulu once Disney acquires the rest of the company to house its raunchier, more adult content. While I do not think this will unseat Netflix, the idea Disney will not gain ground is completely asinine.
Why I Am No Longer Bearish
I have written pretty extensively about why I think Netflix is a buy and I stand by my most recent price target $400, which I'll link here for those of you interested in my specific forecasts and valuation methodology. But on a high level, my change in sentiment comes down to explanations for the company's past disappointments, its proven ability to create new and proprietary IP, and the value of its patents and proprietary technology.
One of the biggest reasons I was bearish on Netflix was because of the company's miss on domestic subscriber numbers in Q2 of 2017. Not only did the company miss, but it missed by a huge margin of approximately 40%. I never believed that people were going to actively discontinue their subscriptions, but this raised some concerns that growth could further slow or halt once new competition enters if it is already showing this much weakness. Q3 subscriber domestic numbers also surprised, when they had a significant beat to the upside, and this variance was explained by Reed Hastings as a product of trials skewing the numbers up or down, and that going forward the company would be reporting a more stable net figure. Subsequently, the growth has remained strong and it appears the problem was indeed simply artificial volatility induced by trials.
Another area of concern I had was the importance of Disney IP to Netflix, including its Marvel shows (Daredevil, Jessica Jones, Iron Fist, Luke Cage, and The Punisher) making up a large portion of its most binged original titles. The numbers I was relying on, however, were fairly old as the company does not report viewership on a regular basis, and since then the distribution in viewership had shifted more towards proprietary Netflix original content. Furthermore, the Disney licensed titles Netflix was producing began to show a decline in viewership and the company has since canceled the whole lineup altogether (most likely as to avoid paying for what would amount to as publicity for Disney's competing service). Given people are still tuning in, and more of them, and they are now going in to watch Netflix specific content, I believe this is a clear demonstration that the company has proven it is capable and possesses the goodwill needed to self-produce viable new IPs that demand the attention of pop culture.
Finally, I have gained a new appreciation for the company's patents and proprietary technology it has developed to create and deliver new and unique experiences. In particular, I was impressed by the company's announced endeavor into interactive storytelling with the goal of creating a hybrid experience that feels something between playing a video game and watching a movie, with the technology and approach first demonstrated by 2018's Black Mirror Bandersnatch. Though it may not seem impressive, hosting an interactive experience that allows users to engage with the story and choose their own outcome from a cloud-based streaming server is extremely technically challenging, and required Netflix to develop a method and solution for this by itself. This is why the argument "there is nothing proprietary about Netflix" is both uninformed and misguided. There is actually quite a bit that is proprietary about Netflix, and as long as it continues to innovate, it will not die out anytime soon.
This sell-off is based on news that I and many others have been discussing over a year or more and seems unwarranted. This sell-off, in my view, provides an opportunity for investors to buy into a great company that is going to be around for the long term. I am not afraid of holding this stock for the long term.
Disclosure: I am/we are long DIS, NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.