NFLX Stock Forecast: Will Netflix survive the competition with Disney and AT&T’s WarnerMedia?

Kun
The article was written by Kun Qiu, a Financial Analyst at I Know First.

Summary

  • Netflix’s 2019 Q1 Financial Statements shows its success in maintaining top position among video streaming service platforms, however, threads of Disney and WarnerMedia should not be underrated. 
  • Disney+ and AT&T’s WarnerMedia both launched their great ambitions, attracting 90 million and 70 million subscribers respectively in a few years.
  • Netflix has advantages in its experience in expanding international market, creating innovative content and producing original works in regional local language.
  • The increasing D/E ratio and long-term negative free cash flow may cause concerns, but status are predicted to improve by 2022 according to Netflix itself and other financial professionals.
  • According to these facts, personally I give Netflix a bullish long-term stock forecast.

On April 16 2019, Netflix published its 2019 Q1 Financial Statements. The report shows that in the first quarter of 2019, NFLX stock witnessed an outstanding performance resulting from the company’s activity in both domestic and international markets. Domestic revenue increased by 13.9% compared to the same period in 2018 and International market presented an even better increment of 32.8%.

NFLX stock

(Data source: Netflix)

According to Q1 2019 Letter to Netflix Shareholders, Netflix now have over 148 million paid subscriptions worldwide, including 60 million in the United States. With fast expansion in the international market, Netflix seems successfully maintain its top position among all video streaming services platforms. However, the potential threats of Hulu, Disney+ and WarnerMedia should not be underrated.

Disney and WarnerMedia: Aggressive Competitors in Online Streaming Media Market

In April, Disney held its investor day, providing a series of positive predictions for its Netflix-like service Disney+: With plentiful famous and popular films from Disney, Pixar and Marvel Studio, Disney+ is projected to attract 60 million to 90 million subscribers by the end of 2024, among which two thirds coming from international market). ESPN+ (targerting for sports services) and Hulu (targeting for adult viewers), are expected to attract up to 12 million and 60 million subscribers respectively.

Competition became more intense when AT&T’s WarnerMedia announced that it would launch its new streaming service later this year. The new service will be stocked with contents of high quality from HBO and Warner Bros. Picture. Some popular and classic TV shows like Friends will be exclusively presented in this new-launching streamline service. John Stankey, the CEO of WarnerMedia, claimed to reach 70 million subscribers in the first step.

WarnerMedia’s HBO Now has already attracted 8 million subscribers while Disney owns 30 million subscribers with Hulu and ESPN The battle between various video streaming services is so fierce that we can smell the smoke before it officially starts.  How can Netflix prepare and survive the upcoming intensive competition?

2 Key Factors that will Determine Netflix Future Success

International market

While Disney just anticipate two thirds of its future subscribers from international market, Netflix has already gained more revenue abroad for continuous 4 quarters.

NFLX stock

(Source: eMarketer.com)

Although Netflix had an outstanding performance in European and North American market in 2017, it was struggling with the large Asian market. Back to that time, It was estimated that the total number of Netflix subscriptions in Asia-Parcific region is about 4.8 million, accounting for only 1.4% of the total online video users in the region of 341 million. High subscription fee and lack of content in local language were two main barriers. In 2018, Netflix took a series of actions to enter Asian market: In targeting India, Netflix had tested various price models to position itself against both local and international competitors, and also announced to launch 100 original projects in India in a few years. In Malaysia, Netflix had decided to test its first mobile-only package in November 2018, preparing for initiating this plan in other developing Asian countries if it was proven to be a success. In South Korea, Netflix got licensed from a local large entertainment firm JTBC, presenting TV shows such as Man x Man, Chef and My Fridge and Abnormal Summit after their air on JTBC. According to market research company Nielsen Koreanclick, Netflix is expanding quickly in South Korea with 2.4 million subscribers now, which reflects an almost 5 times increase within one year.

Netflix also put great efforts to make its way to China market. Though Netflix had to end its partnership with iQiyi  (a top video portal in China), it turned to another plan targeting the millions of Mandarin speakers outside of China. Netflix had bought various popular Chinese TV dramas of high quality. Bought by Netflix as an original series, The Rise of Phoenixes (IMDb score 8.8) is a typical example of Netflix choice of Chinese TV dramas.


(Source: Mangotv.com)

Netflix’s strategic adjustment in Asian market brought back increasing international market revenue. Up to now how Disney and WarnerMedia expand internationally still remain mysterious, but Netflix had already taken off globally.

Content Creation

Content is always the core competitiveness in online video streaming service platforms. Disney had announced that it would end its partnership with Netflix by the end of 2019, which means Netflix will lose popular films such as Star Wars, Marvel and Pixar. Although losing these beloved films could be a huge loss of Netflix, Netflix has already figured out the countermeasures by developing its own original IPs such as “Stranger Things” and “Umbrella Academy”. In December 2018, Netflix launched Black Mirror: Bandersnatch, taking interactive storytelling video content for adults to the next level; In February 2019, Netflix’s film Roma won 3 Academy Awards for Best Cinematography, Best Foreign Language Film and Best Director, which also indicating its important role in Hollywood industry revolution.


(Source: Happyeiga.com)

Besides, Netflix put great efforts in developing derivatives related to its original IPs. Netflix is releasing a video game based on “Stranger Things” in 2020 collaborating with Finish developer Next Steps.

Content creation is regarded as Netflix weakness when compared with Disney and WarnerMedia, because of their numerous classic works accumulated in history. However, if we look from another perspective, Netflix has a big advantage for its innovation and flexibility in content. Targeting for Asian audience group, WarnerBros’ film Crazy Rich Asians was a huge success in North America, with a rating of 91% in Rotten Tomatoes and a total box office of 170 million dollars in North America. However, this film got only 2 million dollars in China with a DOUBAN (Chinese IMDb) score of 6.1. The film may be a nice dish for North American audiences, but in Asian market, similar idea may not be effective. Several beloved Pixar films’ box office performances did not meet expectations in China such as Inside Out and Wreck-It Ralph.

While Disney and WarnerMedia still produce content mainly in American style, Netflix can easily localize by adjusting different strategies in different regions. This enables Netflix to cooperate with local entertainment companies, hire regionally popular actors/actresses and produce more regionally-appealing works, eventually reaching more international customers.


(Netflix’s first Mandarin-language original series Nowhere Man,source: Netflix)

Ratio Analysis of Netflix Financial Performance

NFLX stock
(Source: Stock Analysis On Net)
NFLX stock
(Source: Stock Analysis On Net)

The ROE of Netflix was steadily increasing from 2016 to 2018, which suggests that Netflix’s ability in earning profit presents an outstanding increment trend; In the meantime, its liquidity ratio remains stable at around 1.5, which also reflects its stable status in company financial segment.

NFLX stock
(Source: Stock Analysis On Net)
NFLX stock
(Source: Ycharts)

However, the continuously increasing D/E ratio may cause concerns, which shows that Netflix had been aggressive in financing its growth with debt. The long-term negative free cash flow also needs great attention. However, since Netflix is still expanding its market, creating high-quality original works and making efforts to attract more subscribers, such an aggressive financial strategy seems acceptable at present. Wolfe Research managing director Marci Ryvicker predicted that Netflix will generate positive free cash flow by 2022.

Conclusion

Influenced by the emerging two big competitors, Netflix still has advantages in its mature international strategy and easily adaptive local content creation. Netflix still devote large amounts of money in creating high-quality original content, thus resulting in increasing D/E ratios and negative free cash flow. However, Netflix’s updated financial statement shows they are still attracting more subscribers at a high speed. Also, Netflix predicted its FCF would improve in 2020. Based on strategic and ratio analysis above, personally I will give Netflix a bullish outlook.

According to Yahoo Finance, the average analyst price of Netflix is $388.62, slightly more than current price ($371.04).  The majority, about 61% of analysts give a “Buy” recommendation for Netflix.

NFLX stock
(Source: Yahoo Finance)

Current I Know First NFLX Stock Forecast

NFLX stock

The I Know First machine learning algorithm has already made a forecast on 27 June 2019 with a positive outlook for NFLX stock over all time horizons. I Know First forecast is the most bullish for the 1-year period with a strong signal of 405.90 and predictability indicator of 0.64.

Past I Know First Success With NFLX Stock

NFLX stock

NFLX stock

On November 8, 2018, I Know First published a bullish 3-month forecast for NFLX stock. Since then, NFLX stock price had seen a increase of 6.13%, from $328.00 to $347.57, highlighting another success of I Know First’s algorithm. 

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