Many analysts and pundits are saying that Netflix (NASDAQ:NFLX) stock is in trouble, pointing to looming competition from Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) and the net decline of the company’s U.S. subscriber count in the second quarter. But that pullback by NFLX stock in the wake of those has created a very good buying opportunity for long-term investors.
There’s been a vigorous debate among analysts and pundits about whether and to what extent rivals’ new internet video offerings will hurt NFLX stock. I think the stepped-up competition will provide Netflix’s results and NFLX stock with a tremendous boost.
Heated Competition Looks Like Blessing in Disguise
To be sure, the reams of hype likely to accompany the rollouts of Disney+ and Apple TV+ will spur even more cord-cutting across America. The publicity will make more viewers aware of the tremendous volume of shows and movies that are now available online, causing a further exodus from cable and satellite services.
An April report by Convergence Research Group predicted that, by the end of this year, 34% of U.S. households would “cut the cord,” that is, give up their cable or satellite subscription.
But by providing more content and working hard to publicize their services, Disney and Apple will accelerate that trend in 2020.
Consequently, many more Americans will realize that they can save money — and still get access to more than enough content — by cutting the cord.
As a result, from 34% at the end of 2019, the percentage of Americans with internet video services will, I believe, roughly double to 68% by the end of 2020.
In 2018, there were about 128 million households in the U.S. Rounding that up to 130 million (to account for the passage of roughly two years) and multiplying by 68% yields 88.4 million homes.
If NFLX, as the first mover in internet video, can get 90% of those households, it will have 80 million subscribers. Knocking of 10% to account for password-sharing between households leaves us at 72 million. That’s well short of Netflix’s 90 million U.S. subscriber goal, but it’s nearly 20% above the company’s slightly more than 60 million subscribers as of the end of Q2.
A nearly 20% gain in 18 months should please and pleasantly surprise the owners of Netflix stock while hurting the credibility of bears on NFLX stock who argue that the company has reached a saturation point in the U.S.
Assessing Rivals Threat
Can Netflix really boost its subscriber base in the face of new competition?
The answer is “definitely” and for a couple of reasons. First, I’d argue that the services from Disney and Apple probably won’t really have the same attributes as Netflix. Disney’s entertainment service, Disney+, will likely consist primarily of movies and TV shows geared to children and/or fans of action shows. Apple’s service looks likely to consist primarily of reruns and movies, with only a few original shows. So Netflix will remain the only highly popular streaming option with a great deal of original content meant to appeal to mainstream adult audiences.
Second, the price points of the streaming video services should allow a majority of Americans to afford more than one streaming service. Disney+ will only cost $6.99 per month. AAPL hasn’t announced the price of Apple TV+, but it’s expected to be well below the $13 cost of a standard Netflix plan.
Most Americans are used to paying around $80 at least per month for TV content. So shelling out $20 or $30 per month for multiple streaming services isn’t going to give most people sticker shock. Moreover, most of the consumers with the highest disposable income still have cable. As many more higher income Americans cut the cord, they’ll definitely be able to afford three or more internet video subscriptions.
Real Prize for NFLX Stock
As is often the case, many analysts and pundits are getting caught up in the trees instead of focusing on the forest.
They’re focusing on the 126,000 net U.S. subscribers Netflix lost last quarter while ignoring the company’s real opportunity to become the first truly worldwide TV service. They made a similar mistakes last year with Snap (NYSE:SNAP), as they focused on the company’s small subscriber losses and ignored its huge ad revenue opportunity.
Let’s say that, in five years, Netflix becomes about twice as popular as Apple worldwide. That’s not an unrealistic goal, since Apple’s market share in many countries is actually quite low.
In 2016, Credit Suisse estimated that there were nearly 600 million Apple users worldwide. If 1.2 billion adults live in households that subscribe to Netflix, and 600 million households pay an average of $10 per month for the service, its revenue would be $72 billion per year. If its profit comes in at $10 billion, its earnings per share would be $23. A price/earnings ratio of 25 would put Netflix stock’s price per share at around $525, versus today’s $325. And that doesn’t account for likely price increases by 2025 or other forms of revenue that could eventually kick in, like advertising, theme parks, and premium services.
Bottom Line on Netflix Stock
Increased competition could actually boost Netflix stock by enticing many more Americans to cut the cord. Meanwhile, NFLX stock could increase around 80% over the next five years if the company continues to sign up subscribers around the world. Although NFLX will have to execute well to accomplish that goal, given the company’s huge success so far, long-term,speculative investors should make that bet.
As of this writing, the author did not own shares of any stocks mentioned.
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