The decision by Walt Disney Co (NYSE:DIS) to go head-to-head with Netflix, Inc. (NASDAQ:NFLX) as a video streaming service temporarily halted the momentum in Netflix stock during November, but it will not have a dramatic impact on the company.
That’s because, as anyone who reads a quarterly report knows, Netflix’ U.S. operations are already peaking. The only way for it to grow revenue here is to raise prices, as it has begun to do, and there is a limit to that.
The real growth engine for Netflix is its international operations, where revenue is now nearly equal to that of the U.S., having nearly doubled year-over-year, with losses turning into profits and the market barely scratched.
In these markets analysts feel Netflix has little to fear from Disney, and much more to fear from companies like Alibaba Group Holding Ltd (NASDAQ:BABA), which can grow in a “captive” Chinese market and then compete across Asia.
Even there, the truth is more complex.
Competition Makes You Sharper
China’s streaming market is more competitive than that of the U.S., and Netflix has found a way in, a content licensing deal with iQiyi, a unit of Baidu Inc(ADR) (NASDAQ:BIDU) signed in April.
There is also Tencent Video, owned by Tencent Holdings Ltd (OTCMKTS:TCEHY), whose market cap exceeds that of Alibaba. Tencent has been working with HBO, a unit of Time Warner Inc (NYSE:TWX), since 2014. An AT&T Inc. (NYSE:T) purchase of Time Warner would bring them into the mix.
Alibaba is represented by Youku Todou, acquired in 2016. It began with a free, ad-supported model like that of Google’s YouTube, a unit of Alphabet Inc (NASDAQ:GOOGL) and is now trying to convert users into customers. Its continuing losses may be behind the recent resignation of Alibaba Pictures head Yu Yongfu, previously considered a potential successor to Jack Ma himself.
At some point, Chinese leadership is going to emerge, and that leader will likely be much larger, by market cap, than Netflix. Baidu, the smallest of the three potential Netflix competitors, is almost as large by market cap as Netflix right now, while the other two Chinese dragons are similar in size to Amazon.com, Inc. (NASDAQ:AMZN).
The Chinese market competition, in short, has yet to play out.
The End Game Is Not Here
Right now, Netflix is the only paid streaming service with plays in all major markets. Its primary competitor in the rich Indian market is Amazon whose Prime Video now offers locally-produced shows like Inside Edge, which is about cricket.
Still, the numbers tell the story. Netflix is winning around the world on its own terms and has no need to merge with anyone. Its rich valuation, a market cap more than eight times its projected 2017 revenue of nearly $11.7 billion, makes it prohibitively expensive for all but the most well-heeled acquirer. That’s why Disney made the move it did; at Disney’s market cap of $162 billion a Netflix acquisition would be prohibitively dilutive to current shareholders.
The Bottom Line on NFLX Stock
Still, the relatively small size of Netflix compared with that of the Internet Cloud Czars, both in the U.S. and China, means that an eventual acquisition is nearly inevitable.
Anticipation of that bidding war puts a hard floor under Netflix’ stock price. My own guess is we’re still three years away from such a war. A purchase by, say, Facebook Inc (NASDAQ:FB), which has a market cap of nearly $520 billion, is financially possible today, but it won’t happen until an acquirer requires Netflix’ enormous demand for storage and communication capacity, and has the excess capacity to handle it.
At that point, the bidding war will be something to see.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and BABA.
