Netflix, Inc. (NASDAQ:NFLX) is well-known for its volatility, and this year has been no exception. NFLX stock is down 15% this year and has fallen 30% from its 52-week high.
Needless to say, shareholder sentiment is not overly optimistic.
However, by the time 2016 comes to an end, Netflix shares will be near or at new highs. The big question though is whether NFLX stock can keep moving higher into 2017, and monetize the opportunity it has been given.
NFLX Stock IS Going Higher This Year
Netflix is bogged down yet again today, this time on a downgrade by Jefferies — just a day after a downgrade from Needham & Company. But forget about the short-term wiggles for right now. Because regardless of how much NFLX struggles in the next few days, the rest of the back half of 2016 is going to be much better.
That’s because Netflix’s long-awaited content deal with Walt Disney Co (DIS) will finally start in September.
For years, Netflix has spent billions of dollars building its library of content. This year alone, NFLX is expecting to spend $5 billion, and then $6 billion next year. However, all those billions of dollars will unlikely have the effect that gaining Disney will for subscriber satisfaction, retention and acquisition.
And best of all, NFLX has to pay just a few hundred million to Disney.
What it gains is all the newly released content from Disney, Pixar, Marvel and LucasFilm. Collectively, Disney’s film studio controlled 15% of the market in 2014, 20% last year and more than 30% in the first six months of this year. That’s incredible for Netflix.
It is a sleight of new content that Netflix could not easily acquire in the open market, and when you combine the content library of past films that NFLX will gain from Disney, it becomes apparent that Disney content might very well be Netflix’s most valuable asset.
Given that much of the losses in NFLX stock over the past year have been tied to increased competition and higher content prices, the fact that Netflix has gained rights to the film industry’s undisputed champion, much of those fears will diminish.
In other words, competitors can’t really compete and subscribers have no reason to leave with Disney’s never-ending list of blockbuster movies being added to the mix. This means the chances of NFLX stock returning to past highs by the end of this year on improved sentiment is more likely than not.
Netflix Still Not Worth the Price
So NFLX stock may return to $130 per share within months of its new Disney partnership. The big question is: Will it stay there?
Fact is that even with Disney content, NFLX is not worth $130 a share, or what would be $55 billion in market capitalization. With that said, the inclusion of Disney content will keep Netflix users on the platform, but because it is a U.S. deal, it will have no effect on Netflix’s faster-growing international business.
In regards to the U.S., Netflix has 47 million paid members. This means NFLX is in nearly half of all U.S. homes. According to eMarketer, over 65% of internet users consume Netflix, a total of 126.9 million consumers. Investors must realize that Netflix’s subscriber growth in the U.S. is very limited.
But let’s say that the addition of Netflix leads to an acceleration of U.S. subscriber growth, and Netflix can peak at, say, 70% of internet consumers. That’s still not going to make a meaningful difference to Netflix’s top and bottom line — not enough for NFLX stock to support a $55 billion market capitalization.
After all, Twenty-First Century Fox (FOXA) is a $50 billion company. It has annual revenue over $25 billion. NFLX has revenue of only $7 billion! Clearly, there’s a serious disconnect.
Netflix Must Monetize the Disney Opportunity
Over the past year, Netflix has raised prices in many international markets. Even in the U.S. it has been trying hard to get all members on the $9.99 per month plans. Still, $9.99 per month is insignificant.
Now that Netflix will soon have the many blockbusters from Disney, Pixar, Marvel and LucasFilms, its opportunity has never been greater to significantly increase prices. Even if Netflix charged $20 per month in the U.S., it would still be cheaper than cable, and would allow NFLX to create $12 billion annually from its U.S. business alone.
If so, one could make a real argument that NFLX stock is worth $130 a share, maybe more.
So we’re looking at an interesting future here. NFLX stock should get to $130 later this year no matter what, just thanks to Disney optimism. But what Netflix actually does with the Disney opportunity will determine whether it’s a volatile road to and once NFLX hits $130, or a strong, sustainable path.
One thing is for sure: We will know soon enough what Netflix plans to do.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.