If you’ve been savvy enough to own shares of Netflix (NFLX) and/or Disney (DIS) for the last five years, your prescience has been amply rewarded. NFLX stock is up more than 400% in that time, and DIS stock is no slouch either, up 200% in the last half-decade.
But most investors don’t have crystal balls in their investing arsenals, and if you bought into either stock within the last month or so, you’re probably sitting on losses. In fact, both stocks are down 15% since Aug. 5 — that’s about three times the 5.9% selloff in the S&P 500.
Thankfully, shares of NFLX and DIS stock didn’t become long-term winners through sheer luck, and the two are rumored to be teaming up once again — this time to bring the Star Wars franchise to Netflix in Latin America.
(*Cha-ching*)
If this deal goes through — the two companies are “in talks” right now, according to the Wall Street Journal — both companies stand to benefit big-time. Here’s what each firm will gain from the deal, and why investors will surely applaud the move as a result.
Commencing Netflix Global Domination Plans
I’ve said it before and I’ll say it again — The NFLX stock price is absolutely nonsensical by pretty much any conventional valuation methods.
It trades at 342 times forward earnings. While its price/earnings growth ratio (the lower the better) sits at 21.7. To put that in perspective, value stocks have PEG ratios below 1.
Rather than fluctuating on the basis of things like earnings and revenue growth, NFLX stock has been largely driven by the astronomical growth of its subscriber base. And Wall Street’s love saga with subscriber growth waxes and wanes with the international segment, where Netflix has less market exposure and therefore more opportunities.
When NFLX stock was in freefall earlier this month, the company announced plans to launch in four large Asian markets — South Korea, Singapore, Hong Kong and Taiwan — by early 2016.
In markets where Netflix already has a presence, the growth strategy is simple: Continue to produce and/or license quality content. It’s no stretch to say that the Star Wars franchise, which boasts global box office revenues of nearly $5 billion when adjusted for inflation, qualifies as quality.
Disney: Please Believe the Hype
Disney’s motive here isn’t just the immediate licensing revenue. No, no; the House of Mouse wants to increase awareness in the Star Wars franchise in Latin America, which inexplicably isn’t deeply familiar with the trials and tribulations of time-tested characters like Chewy and R2D2.
Specifically, Disney would prefer to increase awareness in Star Wars in the months leading up to the December release of the seventh installment, Star Wars: The Force Awakens. The sure-to-be-blockbuster film is expected to do absolutely insane box office numbers, with Deadline predicting an all-time record $615 million worldwide opening.
DIS stock owners will surely be waiting eagerly to hear those figures, as opening weekend numbers are great historical indicators for how profitable the film will ultimately turn out to be.
One caveat for Disney’s potential Star Wars launch in Latin America: DIS doesn’t own the rights to the original film — Twenty-First Century Fox (FOXA) does. But if NFLX and DIS reach a deal to provide the latter five installments, I expect FOXA to come in on it too.
That’s what happened last week, when DIS and FOXA agreed to license online distribution rights to the whole six-film franchise to Chinese tech giant Tencent (TCEHY).
As markets begin to gain some bullish sentiment after the panic selling in August, DIS and NFLX stock should both get some upward “force” if they end up inking the deal.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
