Netflix (NASDAQ: NFLX) stock has been one of the best-performing names for the past decade. Netflix stock is up more than 6,000% since 2009, and the company’s long-term growth outlook is as strong as ever.
However, this year, Netflix is facing a unique new challenger in Walt Disney (NYSE: DIS). Disney recently announced its highly anticipated streaming service, Disney+, will be launching in November. Disney+ will be a direct competitor to Netflix, offering the entire Disney content library at an extremely low $6.99 monthly price.
Some Netflix stock bulls are starting to get nervous about the potential impact Disney+ could have on Netflix’s subscriber count. However, a new survey by research firm Piper Jaffray suggests Disney will likely not be a real threat to Netflix anytime soon.
It’s understandable that the owners of Netflix stock would be a bit uncomfortable about Disney+ given Disney’s long-term track record of success in the media business. In addition, some experts have made predictions about Disney+ that are probably scary for the owners of NFLX stock.
In April, a survey by Streaming Observer found that 14.5% of current Netflix subscribers are considering cancelling their Netflix subscription in favor of Disney+. Those survey results are certainly troubling for NFLX. Based on the most current numbers, 14.5% of current Netflix subscribers represent about 9 million customers. If they all jump ship for Disney+, Netflix’s monthly revenue would take a $116.9 million hit.
However, the latest Piper Jaffray survey of 1,536 U.S. Netflix subscribers is much less bearish for Netflix stock. Piper Jaffray found 73% of Netflix subscribers have no intention of getting a Disney+ subscription at all. In addition, 20% of Netflix subscribers intend to have subscriptions to both services.
Consequently, just 7% of current Netflix subscribers intend to cancel their Netflix subscription in favor of Disney+. It’s worth noting that the sample size of the Piper Jaffray survey was more than twice the size of the Streaming Observer survey.
The Power of Momentum
The idea of only 7% of Netflix users switching to Disney+ is much better for NFLX stock bulls than the possibility of the company losing 14% of its customers. However, the owners of Netflix stock should still be troubled by the prospect of the company losing 7% of its customers.
Fortunately, there’s reason to believe the actual losses will be much smaller. Whether it’s called momentum, stickiness, fear of change or sheer laziness, Piper Jaffray analyst Michael Olson says customers tend to be more bark than bite when it comes to switching services.
“We typically find that a larger percentage of subscribers say they will cancel certain services than the percentage that actually follow through on it, so the 7% figure is likely overstating the risk to the Netflix U.S. sub base,” Olson says.
Based on its survey results, Piper Jaffray is projecting Netflix could lose about 5% of its fiscal 2020 U.S. subscribers to Disney+. In the international market, the firm is projecting just a 1% subscriber loss to Disney. Based on his projections of revenue and earnings per user, Olson says that subscriber loss would result in about a 25-cent hit to Netflix’s 2020 earnings per share. 25 cents is only about 4% of PiperJaffray’s 2020 EPS target of $6.50 for NFLX.
The Real Threat to NFLX Stock
If Netflix loses just 4% of its 2020 market share and earnings to Disney, it’s safe to say the threat will be contained. However, the survey results don’t necessarily mean investors should rush in to scoop up Netflix stock.
Disney is not the biggest risk to the owners of NFLX stock . The real risk is the sky-high valuation of Netflix stock. NFLX stock trades at a price-earnings ratio of 126.15 and a forward PE of 58.9, among the highest in the S&P 500. Sure, its net income was up 18.5% last quarter and its revenue jumped 22.1%. But even when growth is factored in, NFLX’s PEG ratio of 2.7 is still extremely high. Its price-sales ratio (9.1) and price-book value (26.4) are the highest among the rapidly growing FANG group by a wide margin.
Bulls will argue that Netflix stock price has been high for years, and it hasn’t kept NFLX stock from consistently beating the market. That’s a fair and true argument. But the reality is that NFLX stock is already pricing in at least several more years of exceptional growth.
The bar is extremely high. Any signs that subscriber growth is slowing, Disney and other competitors are gaining market share or NFLX’s profit margins aren’t expanding the way the market had anticipated could tank Netflix stock price.
At best, Netflix is a high-risk stock with zero wiggle room when it comes to long-term growth . At worst, NFLX stock is an overvalued name that’s pricing in unrealistic optimism towards a company that can’t continue growing like this forever.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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