Analysts had estimated that 8 million people would subscribe to Disney+ from Nov. 12 through the end of 2019. The entertainment company surpassed the estimate by 25% in a single day. Disney could finish 2019 with 15 million-20 million subscribers, well ahead of schedule.
Disney had originally estimated that Disney+ would attract 60-90 million subscribers by 2024. After Disney announced that it had reached the 10 million milestone, Wedbush analyst Daniel Ives wrote in a note to clients that the home of Mickey Mouse could hit 60 million subscribers by 2022, a full two years ahead of the company’s own projection.
That may make the owners of Netflix (NASDAQ:NFLX) stock a little anxious.
But before you jump onto your computer and buy DIS stock and short NFLX, you might want to consider the big picture a little.
The Honeymoon Will End
There’s no question that Disney+ attracted many subscribers on its first day. It would be interesting to know what Netflix’s best single day of subscriber additions has been since it started video streaming in January 2007. I suspect the answer could be several hundred thousand, but it’s unlikely we’ll ever know.
Disney released the figure to create excitement among both consumers and investors. That enthusiasm will fade.
Furthermore, DIS did not identify how many consumers are getting Disney+ for free. Since certain Verizon (NYSE:VZ) customers got the service for free and Disney offered a free seven-day trial, many of the 10 million subscribers will probably either quickly drop the service or won’t pay Disney anything over the next year.
Thus, analysts’ average estimate of 8 million paying subscribers by the end of the year may prove to be accurate.
“What concerns me other than the one year free, which will obviously have no churn for a year, is that with limited original content, I feel like adults will burn through the content fairly quickly and you may have quite significant subscriber (drop outs),” Pivotal Media analyst Jeff Wlodarczak told Variety.
“There are still 33 [million] households in the U.S. that have children under 13, which is a significant market, but I would be very cautious extrapolating these unquestionably strong initial results too aggressively,” Wlodarczak added.
Disney+ Could Be Robbing Peter to Pay Paul
Wlodarczak is suggesting that Disney is going to have to snag a significant chunk of the households with children under 13 in both the U.S. and overseas if it wants to attract 60 million -90 million subscribers.
For comparison, it took Netflix 12 years to get to 60.6 million U.S. subscribers and 97.7 million abroad. And it was facing little competition. Disney+ faces several well-financed competitors, including Netflix, who is not about to take Disney’s move lying down.
Overall, I like Disney stock. However, that doesn’t mean that I believe Disney’s gains will come at Netflix’s expense. And the success of Disney+ could actually undermine DIS stock.
InvestorPlace columnist Larry Ramer recently discussed that very subject.
“I think about two-thirds of today’s cable subscribers will cut the cord by the end of 2021,” Ramer wrote in an article published on Nov. 19. “If Disney loses two-thirds of its Media Networks profit and everything else stays equal, its overall profit will fall by more than one-third.”
Ramer goes on to argue that Disney’s won’t be nearly as profitable in the future as it is today, making the longer term outlook of Disney stock uncertain.
The Bottom Line on Disney Stock
There’s no question Disney+ is off to a great start. However, like Ramer, the other InvestorPlace contributor, I do see the downside of its new direct-to-consumer approach.
As for Netflix stock, I think it is flawed logic to view Disney+’s initial success as a sign that NFLX’s business is weakening. Furthermore, unlike Disney, Netflix has nothing to lose from cord-cutting, a trend that’s going to accelerate over the next few years.
As NFLX continues to tweak the process of producing its own content and getting it into the hands of movie lovers everywhere, there will continue to be much debate about how many or how few theaters should get Netflix’s films before they become available to the company’s 158 million subscribers around the world.
While I’m not sure how that issue will be resolved, I do know that Netflix has a plan to fend off the competition, including Disney. I’m also sure that its plan involves making great content available to as many people as possible at a reasonable, but profitable, price.
Even for investors who love Disney stock, as I do, I believe it would be a mistake to go long DIS stock while shorting Netflix. The odds are good that those who do so will get burned.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.