Media giant Disney (NYSE:DIS) made big news Friday as it finally unveiled details and launch dates regarding its highly anticipated Disney+ streaming service. Investors were largely impressed with that reveal. Wall Street reacted by sharply pushing up Disney shares, while dumping streaming competitor Netflix (NASDAQ:NFLX). NFLX stock ended the day 4.49% lower.
Only one of those moves makes sense. While DIS stock should rally because Disney+ will be huge, the NFLX stock drop operates on the assumption that the new streaming service’s success will come at the expense of Netflix. It won’t. It will get huge as Netflix gets even bigger. Call it streaming’s rising tide.
There’s this idea floating around that there can only be one sheriff in streaming town. That’s flawed thinking. The whole world is migrating to streaming, and as it does, consumers won’t just adopt one streaming service to satisfy their entertainment needs. Instead, they will drop the cable subscription, and ultimately just bundle together their favorite streaming services.
All Netflix needs to do is remain one of the best streaming services in the world. If they do that, then the service will continue to grow subs at a robust rate, and NFLX stock will head higher.
That’s exactly what will happen. Fast forward 10 years. There won’t be very many cable TV subscriptions, and both Disney+ and Netflix will be in pretty much every household. As such, I think there’s reason to own both DIS and NFLX stock for the long haul.
Netflix Will Remain Top Dog
There are two big ideas here.
First, the cost of cable TV is so high that consumers can cut the cord, adopt multiple streaming services, and still save tons of money, meaning that the average consumer in a decade will have no cable TV subscription but multiple streaming service subscriptions. Second, due to its data and reach advantages, Netflix currently is, and will remain, the best streaming service in the world, and will be eventually be adopted into nearly every internet household in the world.
On the first idea, the average cable TV bill runs around $100 per month. YouTube TV, which is roughly the over-the-top equivalent of cable TV, costs about $50 per month. Netflix costs $13 per month. Disney+ will run around $7 per month. ESPN+ costs $5 per month. Thus, the total cost of all those streaming services ($75 per month) is less than the total cost of cable, and the streaming service “bundle” arguably gives you more value because of on-demand original content.
That makes the future here pretty clear from here. Consumers will cut the cord and go to streaming. As they do that, they’ll adopt multiple streaming services, get more content than before, and still save money.
On the second idea, Netflix will remain one of the core streaming services in every streaming “bundle” because it’s the best streaming platform due to its robust portfolio of original content. Quite simply, the platform produces the best original content in the streaming video on demand world because they have more data (they have watching data on nearly 140 million and growing subs) and reach (every piece of content on Netflix is pushed to 140 million subs, so the company can justify big investment with more immediate returns).
Because of these data and reach advantages, which are unlikely to be eroded any time soon, Netflix has already won the content game. In so doing, they’ve secured themselves a place in every internet household in the world within the next decade.
Netflix Stock Upside is Compelling
Over the next decade, both Disney+ and Netflix will grow by leaps and bounds as cord-cutting accelerates to new highs. As this happens, Netflix will become more widely adopted, revenues will soar, margins will expand, profits will take off, and NFLX stock will head meaningfully higher.
The math isn’t too hard. There are billions of internet TV households in the world. A healthy portion of those households will be streaming video households within the next decade. Reasonably speaking, we are talking about upward of 700 million global streaming video on demand households by 2025, if not sooner.
Due to the data and reach advantages stated above, Netflix looks like it’ll remain king of this market for the foreseeable future. Right now, there are 250 million global SVOD households. More than half of them subscribe to Netflix. Assuming that market share holds up, then a 700-million-household SVOD market by 2025 implies 350 million subs for Netflix.
At a $15 monthly price point, that equates to $63 billion in revenue. I’ve long stated that 30% operating margins are the target by then. Assuming so, then $30 in earnings-per-share seems like a reasonable long-term target. Based on a growth-stock-average 20x forward multiple, that implies a reasonable long-term price target for NFLX stock of $600.
Given the secular SVOD market tailwinds and Netflix’s sustainable leadership position in that market, NFLX stock remains on track for $600 in the long run.
Bottom Line on NFLX Stock
Disney+ will be huge, and contrary to popular belief, that’s not bad news for Netflix stock. Over the next several years, these two services will grow side-by-side, and the real loser will be cable TV. As such, in order to optimize exposure to the secular streaming video on demand trend, I think you buy and hold both NFLX stock and DIS.
As of this writing, Luke Lango was long DIS and NFLX.