Netflix & Disney: Whats Next For The Streaming Space?

Netflix NFLX, the cable killer, is continuing its tear with subscription growth appearing to be proliferating to no end. There are roughly 150 million Netflix subscriptions with 20% annual growth over the past 2 years, which is expected to continue. International subscriptions have doubled since the beginning of 2017 and this segment now drives most of Netflix’s top-line.

Subscription-based revenue is king in the tech world today with stable sales quarter after quarter enabling Netflix investors to be comfortable with its abnormally high multiples.

Netflix has been able to incrementally raise prices on consumers effectively without significant impact to its consumer base. This will continue as the firm produces more and more original content and its product offering becomes increasingly valuable.

This 10-year revenue chart is an enthralling site for any investor. The consistent exponential growth is a rare sight to see.

 

Netflix content creation is weighing heavily on the firm’s short-term free-cash-flow. 2019 is expected to show a $3.5 billion free-cash-flow deficit but annual improvement is projected starting in 2020.

Original content creation is burning through cash today but is going to be Netflix’s saving grace as the space becomes increasingly saturated.

Disney+ Impact

Disney DIS is set to launch Disney+, it’s streaming platform, on November 12th and this is expected to shake up the streaming category. DIS surged 12% the day this platform was unveiled. This pivot has already started to thrust this consistent value stock back into growth, sending valuations surging.I expect that valuations will continue to grow as Disney+ gains traction domestically as well as internationally.

Analysts are expecting Disney+ to have 130 million subscribers in 5 years, this would rival Netflix’s 150 million users. International consumers are very familiar with the already globalized Disney brand. I believe that Disney+ will swiftly spread across the world.

To continue to expand at its current prolific rate Netflix is going to have to entice their consumer base with a continuous pipeline of quality original content.

Take Away

Netflix is projected to grow its top-line over 20% this year and next, with analysts estimating a 75% EPS increase. There is no doubt that Netflix is a winning company but as an investor, we want to know if NFLX is trading at a winning price. The stock is up over 40% year-to-date but still trading at the lower end of its 5 year P/E trend although the current 81x P/E is still astronomical.

DIS is up over 30% year-to-date with most of this growth being driven by the Disney+ unveiling. I believe this new revenue driver will provide the company with a considerable amount of growth and its 21x forward P/E valuation will continue to rise as this new platform is proven.

 

 

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