Netflix (NFLX - Free Report) , the cable killer, is continuing its tear with subscription growth appearing to be proliferating to no end, although Disney’s (DIS - Free Report) Disney+ video streaming platform has some investors nervous.
NFLX is up over 36% since the beginning of the year, and has gained almost 500% in the last 5 years, outpacing the rest of FANG. The question we need to pose as investors is whether or not Netflix can continue to return investor the same exponential growth they have seen in the past? Below is the 5-year performance of FANG stocks with NFLX leading the pack.
Netflix is releasing its Q2 earnings on Wednesday, July 17th and the stock’s reaction is likely going to hinge on subscription additions. A beat or miss on additional subscription expectations has caused big moves for NFLX in past quarters.
Subscription Driven Platform
Subscription-based revenue is king in the tech world today with stable sales quarter after quarter enabling Netflix investors to be comfortable with its abnormally high multiples.
There are roughly 150 million Netflix subscriptions with 20% annual subscription growth over the past 2 years. International subscriptions have doubled since the beginning of 2017 and this segment now drives most of Netflix’s top-line.
Net subscription additions are expected to slow this quarter to negative year-over-year growth for the first time. Analysts are estimating international subscriptions to increase by 4.76 million and domestic subscriptions are only expected to grow by 323 thousand.
It appears that subscription expansion is headed towards a plateau. I personally don’t know a single person without access to a Netflix account. This domestic plateau was inevitable, the key now is to both expand international operations and turn higher profits per subscriber.
Netflix has been able to incrementally raise prices on consumers effectively without significant impact to its consumer base. This will continue as the firm produces more and more original content and its product offering becomes increasingly valuable.
Profit per subscriber is up over 31% year-over-year in 2018, and I expect this growth to continue both internationally and domestically as they gain loyal subscribers.
This 10-year revenue chart is an enthralling site for any investor. The consistent exponential growth is a rare sight to see.
Netflix content creation is weighing heavily on the firm’s short-term free-cash-flow. 2019 is expected to show a $3.5 billion free-cash-flow deficit but annual improvement is projected starting in 2020.
Original content creation is burning through cash today but is going to be Netflix’s saving grace as the space becomes increasingly saturated.
Disney is set to launch Disney+, it’s streaming platform, on November 12th and this is expected to shake up the streaming category. DIS surged 12% the day this platform was unveiled while NFLX dipped 4.5%.
Disney closed its $71.3 billion acquisition of 21st Century Fox earlier this year. This was the finally piece of the puzzle that Disney need to launch the Disney+ streaming platform. They will offer 90 years of quality content and are developing a number of TV shows that will be exclusively on this streaming platform.
Disney is rumored to be combining Disney+ with FX+, ESPN+, and Hulu, which they gained a majority stake in following the Fox deal. This combination would significantly broaden its consumer base.
This pivot has already started to thrust this consistent value stock back into growth, sending valuations surging. I expect that valuations will continue to grow as Disney+ gains traction domestically as well as internationally.
Analysts are expecting Disney+ to have 130 million subscribers in 5 years, this would rival Netflix’s 150 million users. International consumers are very familiar with the already globalized Disney brand. I believe that Disney+ will swiftly spread across the globe.
The Disney+ subscription will cost only $6.99 a month, which is almost half of Netflix’s basic HD plan. Analysts are predicting an 80% customer overlap with 20% of potential Disney+ customers not being interested in Netflix according Raymond Jones.
Netflix is projected to grow its top-line over 20% this year and next, with analysts estimating a 75% EPS increase. There is no doubt that Netflix is a winning company but as an investor, we want to know if NFLX is trading at a winning price. The stock is up over 36% year-to-date but still trading at the lower end of its 5 year P/E trend although the current 79x P/E is still astronomical.
DIS is up over 32% year-to-date with most of this growth being driven by the Disney+ unveiling. I believe this new revenue driver will provide the company with a considerable amount of growth and its 21.9x forward P/E valuation will continue to rise as its new platform is proven.
Disney isn’t the only competitor attempting to dethrone Netflix. Amazon Prime Video (AMZN - Free Report) has a considerable amount of the market share, although this doesn’t seem to be inhibiting Netflix’s growth because of the customer overlap. Apple (AAPL - Free Report) also announced it will be releasing its own streaming platform, Apple TV+, at the end of this year, which will add additional friction in the video streaming space.
To continue to expand at its current prolific rate, Netflix is going to have to entice their consumer base with a continuous pipeline of quality original content.
I believe that Disney+ is going to challenge Netflix’s international expansion. Disney is a globalized company with film releases and theme parks around the world. When a potential international customer is deciding between Netflix and Disney+, price point and prior brand exposure will play a role.
When examining Netflix’s Q2 earnings (after the bell on Wednesday) focus on additional subscriptions for ques on stock moves. As I mentioned above, international subscriptions are expected to grow 4.76 million while only 323,000 additional subscribers are expected domestically.
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