Back in September and October, Netflix [NFLX] was struggling as the launch of streaming competitors, particularly Disney+, loomed large. In stark contrast to its monster growth in 2018, Netflix’s share price slipped to a low of $254.59 – a 4.8% drop from the start of the year. At the end of that month, things were not looking much better, but the stock regained some of this loss to trade flat at 0.01%.
Since this low point and despite the US launch of Disney+ on 12 November, Netflix is back on the up. The stock dropped 3% the day after the launch but is up 7.5% as of 17 December, and is now up a healthy 17.2% for the year-to-date.
But if Disney’s [DIS] share price is anything to go by, Netflix will still have a battle on its hands in 2020. Over a month since its streaming launch, the House of Mouse is up by nearly 6.8% and has gained by 35.8% on the year.
Netflix hits choppy waters
During Netflix’s slump in September, Bernstein analyst Todd Juenger predicted that the company would experience steep lows before getting better, suggesting the stock could slip to $230. Despite this, Bernstein still rated the stock ‘outperform’, with Juenger putting a target price of $450 – almost double the low he expected the stock to experience.
Currently, some analysts are less optimistic. Netflix shares dropped by more than 3% on 11 December after Needham analyst Laura Martin downgraded the stock from ‘hold’ to ‘underperform’.
Martin told Reuters that Netflix is expected to lose as many as four million premium US subscribers in 2020 amid growing competition in streaming, which will dent its share price.
Number of US subscribers Netflix is expected to lose in 2020
On top of this, there are multiple factors that could cause an issue for Netflix in 2020, Peter Cohan writes in Forbes. These include negative cash flow of $2.9bn, rising investment in content (which Variety predicts could be close to $15bn), its debt-laden balance sheet – up 20% to $12.4bn last year – and slowing industry growth.
However, Netflix could continue to be a high growth stock over the next five years, Anders Bylund, writes in The Motley Fool. This will make it hard for traders to discount it.
In the past five years, Netflix earnings have grown at an annual rate of 58%, according to Bylund, while Disney’s was considerably lower at 16%.
Even with the launch of Disney+ (and other competitors) Netflix is expected to continue to expand by an average of 42% over the next five years. Disney’s expected average growth rate is closer to 0.4%.
Disney+ pleases investors
Disney is hitting major milestones much earlier than predicted. Disney+ mustered a whopping 10 million sign-ups in its first day of launch. It now boasts 22 million downloads of its streaming platform a month after launch.
Number of Disney+ downloads 1 month after launch
The company has seen major gains since the launch – more than 16.6% throughout November alone – and analysts predict these gains will continue in the months to come.
This will be especially apparent as Disney rolls out its service into various European countries towards the end of the first quarter and into more countries across Asia and the Americas later in next year, Market Realist analyst Ruchi Gupta predicts.
Credit Suisse analysts recently upgraded Disney’s rating to outperform, predicting that the stock could continue to have upside potential, giving it a 12-month price target of $163. This represents more than 10% upside on the current level.
This growth could stretch even further. In November, analysts from Consumer Edge Research and Rosenblatt put a high price target of $175 target on the stock, according to The Motley Fool, a near 21% upside to its current price.
|PE ratio (TTM)||100.74||22.30|
|Operating Margin (TTM)||12.51%||17.18%|
Netflix & Disney share price vitals, Yahoo Finance, 17 December 2019
Is Disney outgunned in the streaming wars?
Netflix currently has a price to earnings ratio of 100.51, a considerable premium to Disney’s 22.30. It also trades at about 57.0X its forward earnings, which dwarfs its industry average of 12.7X and is more than double Disney’s forward multiple of 23.8, according to Zacks Equity Research.
While Netflix’s debt-to-equity ratio of 1.81 is higher than the industry average and more than double Disney’s figure, Zacks considers it to be a superior growth stock.
The research firm’s consensus estimates for Disney’s current fiscal year call for earnings to drop 2.8% to $5.61 per share and for net revenue to grow 17.14% to $81.5bn, largely due to its investments in Disney+.
Meanwhile, Netflix’s current fiscal year consensus estimates suggest a top line increase of 27.4% to $20.13bn, and a bottom-line climb of 25% to $3.35 per share.