Disney’s Twenty-First Century Fox Deal May Haunt Netflix

NFLX stock - Disney’s Twenty-First Century Fox Deal May Haunt Netflix

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It’s been another great year for Netflix, Inc. (NASDAQ:NFLX). The streaming revolution is showing no signs of letting up, as more and more people cut the cord. For 2017, NFLX stock has racked up a sizzling gain of 52% to $189.

So nothing to worry about, right? Well, I don’t think so. Next year could see turbulence for NFLX stock.

One of the problems is that the competitive environment is heating up in a big way. Perhaps the most notable example of this is Walt Disney Co’s (NYSE:DIS) $52 billion acquisition of assets from Twenty-First Century Fox Inc (NASDAQ:FOXA). With this deal, Disney will quickly become a powerhouse in the streaming industry.

While the company already had a treasure trove of content — with assets like Marvel, Pixar, Lucasfilm, ESPN, and ABC — it was still not enough. But FOXA should solve this problem. The company has a variety of franchises like Avatar, Fantastic Four, Deadpool and Marvel’s X-Men (this asset was licensed away before Disney purchased Marvel). Then there are the animation properties, such as Ice Age and Rio. Oh, and FOXA has a considerable portfolio of TV offerings like Empire, Modern Family, American Horror Story: Roanoke, The Americans, American Dad and The Simpsons.

But won’t it take time to organize all this? And isn’t the case that Disney will not have a streaming service until 2019? This is all true.

Yet it is important to keep in mind that the FOXA deal will boost Disney’s equity stake in Hulu by 60%. This means there will be the ability to control the direction of the platform. And yes, Disney has plenty of venues — such as cable channels, the theme parks and so on — to promote Hulu.

Something else: The FOXA deal will expand the global reach of Disney. Assets include SKY (23 million households in the UK, Ireland, Germany, Austria and Italy), Fox Networks International (over 350 channels in 170 countries) and Star India (a reach of 720 million views a month across India and 100 other countries).

According to Disney CEO Bob Iger : “One of the most exciting aspects of our Fox acquisition is that it will allow us to greatly accelerate our direct-to-consumer strategy, enabling us to better serve consumers around the world. As I’ve said before, we believe creating a direct-to-consumer relationship is vital to the future of our media businesses, and it’s our highest priority.”

Granted, this does not to imply that NFLX stock will suddenly implode. Let’s face it: The company has become the top-of-mind brand for streaming — which is certainly valuable. It has also been able to develop compelling content.

But going forward, NFLX will have to fight harder to get new subscribers and keep existing ones. In other words, there is likely to be more pressure on the growth rate. It seems inevitable.

Bottom Line on the NFLX Stock Price

Another adverse impact from the competitive environment is that it is driving up the costs of content development. Operators like Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ: GOOG,NASDAQ:GOOGL) have been writing big checks to develop their own original programming. These companies not only have huge capital bases, but they also do not have to rely solely on monetizing content.

Of course, such things are not luxuries for NFLX. Rather, the company has had to tap debt markets to pay for the escalating costs of content. In fact, next year NFLX plans to spend $7 billion to $8 billion on original programming.

It is also important to note that creating entertainment content can be dicey. Actually, NFLX expects to produce 80 original films for 2018. By comparison, a typical studio develops anywhere from 15 to 25 or so.

So given that NFLX stock has already had a big run, it might be better right now to take some profits.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/disneys-twenty-first-century-fox-deal-may-haunt-netflix/.

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