Earnings season always produces at least a few surprises, and Netflix (NASDAQ:NFLX) will almost certainly make waves. With Netflix stock up over 30% year-to-date, the markets generally believe that the streaming giant’s ambitious growth plan is reasonable. However, an old rival suddenly emerged with a shot across the bow.
Of course, I’m referring to Disney (NYSE:DIS) and their streaming service, Disney+. For quite some time, analysts offered their opinions regarding the impact their new venture will have on the Magic Kingdom. More importantly for stakeholders of NFLX stock, they rightfully worry about Disney’s vast content umbrella.
After all, what makes this legacy company and American icon so relevant today is content. With their Star Wars franchise, Disney essentially has the right to print money. Even too-cool-for-school millennials who eschew big, corporate products flocked to almost every Star Wars release. Immediately, that put pressure on Netflix stock.
In addition, consumers buy Disney’s merchandise by the truckful.
But it’s not just that. Disney announced the pricing for their streaming service, which comes in at a shockingly low $6.99 per month. Management isn’t shy about sparking a pricing war with NFLX, which they attribute to their offering’s initial low content volume.
Therefore, despite this year’s bullishness toward NFLX stock, Netflix has serious competition to address. Here are three things to watch when the company releases results for the first quarter of fiscal 2019 on Tuesday:
Is Disney+ an Acute Threat to Netflix Stock?
At first glance, the $7 price tag for Disney+ really hurts Netflix stock. After the announcement last Thursday, shares slid badly, losing 4.5%.
The news came at an awkward time for Netflix. First, NFLX stock was building some momentum before Disney’s disclosure cast a dark cloud. Second and more importantly, management hiked its subscription prices earlier this year.
Naturally, the markets took a dim view on this suddenly shifting environment, and punished Netflix stock accordingly. However, I believe the bearish sentiment is a little overdone. Sure, the optics don’t look good. Still, Disney shareholders can’t like what they’re looking at, either.
I’m not sure how sustainable or smart this discounted subscription offering is. Of course, Disney being Disney, it has the resources to play aggressively. I just don’t think that pricing is the right focus here. They already have the content for which everyone will gladly fork over their hard-earned money. Why commoditize something that you don’t need to?
And since Disney+ is a big minus on pricing, I don’t see the incentive for people to switch over permanently. Likely, what would happen is that people will subscribe to both services.
I’m curious to hear what Netflix’s leadership team has to say. My gut tells me that Disney+ isn’t the threat to NFLX stock that naysayers make it out to be.
Subscription Growth can Make or Break NFLX Stock
As with any paid service, subscription growth will play a significant role in determining where Netflix stock will go. Here, the streaming firm must contend against the law of large numbers. As an upstart organization, any numerical gain generated wild percentage-based growth. But as NFLX dominated the streaming segment, adding a million new worldwide subs just isn’t that impressive anymore. In fact, analysts would consider that haul downright disappointing.
Fortunately, though, Netflix has generally delivered the goods. Statistically and fundamentally, I see no reason why this trend should change in Q1.
The numbers really tell the story here. Between Q3 2012 and Q4 2015, sub growth averaged nearly 33% on a year-over-year basis. From Q1 2016 through the latest Q4 2018, average growth was nearly 26%. Yes, we see a notable decline, but this is a remarkably “good” drop-off.
Consider that in the former time frame, nominal subs averaged 50 million people. In the latter time frame, nominal subs averaged nearly 110 million.
Based on recent growth rates, I expect Netflix to turn in at least 157 million subs for Q1. However, the actual tally can be larger than that given Netflix’s investment in quality content. If it is, watch NFLX stock break for the moon: we’re talking a higher service ticket and more subs.
Watch the Technicals!
Despite everything that I just said, none of it matters if the market consensus doesn’t cooperate. It’s an important lesson to not fight the tape: you can be rational, or you can be solvent.
Here’s the thing: I believe in the longer-term prospects for Netflix stock despite the Disney+ threat. The company has carved out a dominant position in content streaming. More importantly, the numbers strongly back up this argument.
Nevertheless, I don’t like the technical action. Beyond the 4.5% loss on Friday, NFLX shares have largely stayed flat since mid-February. This is ultra-low confidence heading into earnings, and that worries me.
Again, the fundamentals should ultimately drive the narrative. Just be aware that the nearer-term journey may involve some unforeseen bumps and bruises.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
