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Global 'streaming predators' could potentially send 'Netflix’s stock down 50%': analyst

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Laura Martin, Needham senior analyst joins Yahoo Finance Live to discuss why Netflix’s biggest risk this year is churn in subscribers and weigh in on the rising competition in the streaming landscape.

Video Transcript

[MUSIC PLAYING]

- All right. Netflix turning heads last week with reports trickling out the company might look to crack down a bit on password sharing. But it really brings into focus the churn concerns that Netflix and some of its other streaming video on-demand competitors face. Joining us now to discuss the outlook for the streaming space this year is Laura Martin.

She's a senior analyst over at Needham. Laura, great to speak with you. Once again, so let's just start with some of the Netflix numbers that you called out, the churn for Netflix skyrocketing, really, up 34% churn in October of 2020. How are you guys looking at the space broadly? And how underappreciated maybe, in your view, are the risks here, that people just decide to say, you know what? Netflix is fine, but I'll do Disney+ for now and think about Netflix in the future.

LAURA MARTIN: Yeah, I sort of think there's two key points here to make, first is we're calling for a digital attention recession in 2021 because for a year, people have been locked in their homes and consumption of television or streaming hours went up by 5 hours a day per household. And so we expect, as people go back into the real world and can eat out and go to school and be with their friends in the real world, since time is fixed, we think that comes at the cost of the digital hours spent, both video games and in streaming hours.

And the other point we'd make is that two years ago, there were only six competitors, including Netflix, and today there are a ton, many of which are very large, deep-pocketed newcomers like Discovery+, Paramount+, and Peacock. So we expect the churn in this industry to go up a lot because you can cancel at any time.

So if the crown drops on Netflix, you can watch them all, pay $15 for the month, in the subsequent month, go and pay $5 for Disney+ or if there's something on Paramount+ you want, pay $5 to them. And already we've seen churn elevated a lot. Even during 2020 churn went from 9% a month to 34% a month between May and October of last year. I only think that gets worse in 2021.

- Laura, specifically, you mentioned Disney+ in your note. You call them quote, "a global predator" for Netflix subscribers. Explain that to us.

LAURA MARTIN: So as you know, Disney+ just recently hit 100 million subscribers after 16 months, a feat which took Netflix 10 years to achieve. So we see that the Disney ma-- first, the Disney brand is really preeminent in the media space. And we think the easiest subscribers for Disney+ to take are Netflix subscribers, who already have their streaming habits set up.

And yet Disney+ is $6 a month, compared to Netflix's standard bundle of $14 a month. So we think Disney+ is coming hard after Netflix subscribers at a much lower price point. In fact, you can get Disney+, ESPN+, and Hulu Here for less money than the single Netflix standard package.

- So you have all these competitors-- Disney+, Paramount+, you have the reopening of the world, really, over the next year-- is it going to be impossible for Netflix to raise prices again successfully?

LAURA MARTIN: Yes, I think so. If they do, they'll lose subscribers. And I think that's by far the biggest risk to valuation because they train at eight times revenue because they have growth credentials, which means that equates to 35 multiple of EBITDA.

It's our view that if they start losing subscribers, they will lose their growth credentials and be forced to be valued on an EB to EBITDA, which would give the stock 50% downside because we have 10 stocks in this group that traded 15 times EBITDA, and today Netflix is at 35 times EBITDA. So if it loses its growth credentials by having subscribers go negative, we think there's real risk to the share price valuation metric.

- And Laura, I mean, it sounds like-- that kind of sounds like Netflix's core model, at this point, is really under siege here. I mean, to me as a consumer all this has been great, a massive subsidy to my viewing time and how much it costs, all of that.

How long does that dynamic continue? Because it's a very different business, or maybe some of these streamers-- or I guess the question would be, are these streamers getting into a different business than maybe they thought they were when they launched these projects a couple of years ago?

LAURA MARTIN: So, I mean, I think Netflix paved the way and was the innovator. But I think what they did is show the IP owners, like the Disneys and the Paramounts of the world, just how valuable their libraries are in a streaming space. And they all have the wherewithal and the investment capital to go and create these tech stacks and recreate their own services.

So I think they're going to, basically, usurp Netflix market cap and take it back for themselves, and we'll see that Netflix market cap falls, my opinion, and it moves over to Viacom, Discovery, Comcast, who actually are the deep IP owners of the original value proposition of Netflix, which was these deep 50,000-hour libraries, with some new production content.

And what's important is that every hour of content produced by Disney can be used in four different windows of monetization because it can be-- made money in the theaters, and in the theme parks, and on its television shows. Oh, and by the way, it can be put on its streaming service in any order they choose. That's a much better business model and return on content investment than Netflix, which has a single business line.