Bad news for Netflix (NASDAQ:NFLX) yesterday: Apple (NASDAQ:AAPL) announced the competing Apple TV+ service at its spring event. Apple’s entry into the streaming business poses a clear threat to Netflix stock. Not only will Apple develop competing programming, it will also exclude Netflix from its Apple TV app.
Although Netflix stock rose in Monday trading despite this announcement, the threat of more competition makes NFLX a riskier prospect.
Apple’s Entry Into Streaming Adds to Netflix’s Troubles
Before Apple announced its entry into streaming, Netflix stock had arguably become the scariest stock in the S&P 500. The high cost of its content development strategy has sent corporate debt levels to new highs. Moreover, with Disney (NYSE:DIS) set to launch its Disney+ streaming services this year, all Disney-owned content will leave the Netflix platform. Conversely, with NFLX’s history of massive moves higher, many investors have perceived NFLX stock as a dangerous short.
NFLX currently trades around $360. I would not consider shorting Netflix stock at least until it falls below $340 per share — the point at which it would trade below its 50-day and 200-day moving averages.
Still, Netflix’s first-mover advantage in the streaming market may be finally coming to an end. Netflix will already lose some of its edge when Disney’s programs leave the service. Moreover, Apple holds $245 billion in cash. Hence, it can afford to outspend the $15 billion in expected content spending for Netflix this year. Also, unlike Netflix, Apple can fund content development without adding further debt.
Netflix will also not work with Apple in another critical area. Apple’s TV app will combine peers like Hulu or Prime from Amazon (NASDAQ:AMZN) in one place. It will also add premium channels such as AT&T’s (NYSE:T) HBO and pay-TV services such as DirecTV. However, Netflix will remain notably absent from this app. This could leave Netflix at a disadvantage.
Netflix Stock Remains Unaffected — For Now
Netflix stock has yet to react to the threat of an Apple streaming service. Although NFLX trades about 15% below the highs of last June, it has risen dramatically from the intraday low of $231.23 per share it saw last December. Analysts have also stuck by profit growth forecasts. Wall Street predicts net income will increase by 50.7% this year and 58.2% the next year.
Moreover, even with the recent increase to $12.99 per month, Netflix has had to borrow massive amounts of money to fund content development. As a result, Netflix holds $10.36 billion in long-term debt, supported by stockholders’ equity of only $5.24 billion. For this reason, NFLX may have to issue more shares to pay its content costs.
The company increased its shares outstanding by 0.99% — or 4 million shares last year. That would raise about $1.45 billion at today’s stock price. If that pace were to rise dramatically, that would place considerable downward pressure on Netflix stock.
The Bottom Line on Netflix Stock
The threat of competition from Apple makes Netflix stock too dangerous to own. The company will already face a serious setback when Disney’s content becomes its competition.
Now with cash-rich Apple entering its business, NFLX’s long-term prospects dim further. Netflix must borrow increasing amounts to stay ahead on content. Despite this pace, Apple can outspend Netflix with a relatively small percentage of its cash reserves. Moreover, with Netflix not on the Apple TV app, it could find itself forgotten by many potential viewers.
Given these threats, I cannot see how Netflix will retain its content lead. With the high valuation and intense competition, I would recommend investors sell Netflix stock before its technical difficulties worsen.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
