Netflix: Why a New Disney Service Shouldn't Steal Subscribers
Don’t expect Netflix (NFLX) subscribers to flee for a new Walt Disney (DIS) direct-to-consumer service, according to new research from one of the company’s biggest bulls.
That might not be a controversial statement after recent statements from Disney indicating that the company doesn’t plan to take Netflix head-on with a single do-it-all service but, rather, a targeted selection—and also questions about what content the company will be able to offer customers because of deals with other companies.
But Imperial Capital analysts, writing Monday, said some investors think that as Disney content moves off Netflix ahead of its planned product launches, Netflix customers may leave too. They shouldn’t, Imperial wrote, estimating that Disney content represents about 6% of current Netflix use and customers use Netflix mainly to watch episodic television, not movies.
“How many Netflix subscribers abandon the service because of the absence of Disney content? We suspect very few if any at any,” they wrote. “And we expect that Netflix will reallocate the [approximately] $300 million it pays Disney to produce alternative content that may otherwise bring in households that do not subscribe to the service.”
Imperial on Monday maintained its “outperform” rating on Netflix shares, lowering its price target (and near-terms subscriber estimates) slightly. Its target, $494, is 44% above current levels and the highest one tracked by FactSet
Its analysts also said that content spending isn’t the only factor restraining profits and free cash flow. Instead, they write, technology and marketing spending is also substantial and if it slows, profits could rise.
“If Netflix had spent $100 million less on technology in 2017, 2017 GAP EPS would have been $1.48 versus as-reported results of $1.25,” they wrote. “Eventually, [its recent levels of spending] on these secondary items will not be necessary, and when that happens, net income and free cash flow will turn substantially positive.”
The company, meanwhile, said Monday that CFO David Wells will leave ”after helping the company choose his successor.” Wells has had the position since 2010, and been with Netflix since 2004. In a company statement, Wells said he would “focus more on philanthropy.”
“I like big challenges,” he said in the statement, “but I’m not sure yet what that looks like.” (Nick Jasinski covered the move for Barron’s today.)
