Online content-on-demand is the hot new thing in entertainment. Offering customers their choice in programming, without schedules and without commercials, the content streaming space promises to change the way audiences watch TV.
The niche has long been the exclusive province of Netflix (NFLX), but this fall both Apple (AAPL) and Disney (DIS) will enter the arena. All three stocks are already showing the effects of the coming competition, as the companies jockey to retain, or to gain, position. We’ve looked into TipRanks’ database, to find out what Wall Street’s top analysts have to say about these companies, and their positions relative to each other.
Netflix, Inc.
The incumbent in the streaming space, Netflix (NFLX – Get Report) should have all the advantages. The company was the early adopter in the field, shifting to streaming after online video technology eclipsed its original DVD-by-mail business. Netflix has used its incumbency well, building a large subscriber base and prioritizing content creation to develop a library of over 400 original programs.
But come November, Netflix will face direct competition from strong players. Both Apple and Disney will undercut the company on subscription fees (more below), Netflix will be hard-pressed to maintain user loyalty. The challenge comes after the company reported disappointing subscription rates in the second quarter. The 2.7 million net adds were far short of the 5 million forecast, and the US market, Netflix’s core, declined by 100,000. And behind this, lies the brutal fact that Netflix has built its proprietary content library by spending over $15 billion annually, with an additional $2.9 billion on marketing. While the company is not quite in the red (fiscal 2019 revenues are estimated at $20 billion), it cannot keep increasing the cost of content creation indefinitely. These doubts lie behind the stock’s shaky performance; NFLX has turned negative for the year, registering a 4.8% loss in share price year-to-date.
Even Netflix’s bulls are growing cautious in this environment. Jeffrey Wlodarczak, writing from Pivotal, reiterated his buy rating but cut far back on his price target – from $515 to $350. He says, “As competition heats up, the right move for Netflix is to increase its spending materially to keep its lead in terms of content. That will temporarily pressure margins and free cash flow, postponing the day when Netflix turns in big profits.”
Despite his acknowledgement that Netflix will have to swallow losses in order to remain competitive on content creation, Wlodarczak remains bullish on the stock for the long term. He adds, “Our new forecasts imply they are going to respond to content cost acceleration by revving up their own content spend that will allow them to maintain their subscriber growth while pushing back profitability materially.” Wlodarczak’s new price target still gives NFLX an impressive upside of 37%.
5-star analyst Andy Hargreaves, of KeyBanc, is also cautious on NFLX. He rates the stock a hold, and says, “The decline in Netflix since Q2 has priced in significant competitive concerns and makes us more positive overall, but only a significant beat with strong growth in mobile plans seems capable of addressing competitive concerns, while a miss could impair bullish views. Without strong evidence to provide confidence in upside potential, we continue to view the short-term risk/reward as neutral.”
Even with top analysts growing reluctant to commit to NFLX, the stock maintains a Strong Buy from the consensus. Shares are selling for $254, and the average price target of $401 indicates confidence in a robust 57% upside potential. The long-term trend for this stock will ride on 2H19 subscription numbers – if Netflix can increase its audience in the face of competition, it will have the resources to avoid operating in the red.
Apple, Inc.
At its annual product launch event, Apple (AAPL – Get Report) gave official details on its new subscription streaming service, Apple TV. The company will undercut Netflix on price, charging $5.99 per month as opposed to Netflix’s basic fee of $8.99. More importantly, Apple will work to monetize its 900 million installed iPhone users. New purchasers of Apple hardware will get a free year of Apple TV, giving existing customers a clear incentive to upgrade their Apple devices.
Low prices and a potential base 900 million strong and of proven loyalty are Apple’s main strengths in the content space. On the downside, the company will have to pay for content and start from scratch. Early indication indicate Apple will launch its streaming service with a library of some 75 shows. While adequate to get started, this is not enough for the long run, even with a captive audience.
At the same time, Apple has one other major advantage over Netflix: Apple is not tied to content streaming for profits or solvency. The company has its iPhone, iPad, and Mac lines, as well as other services like Apple Card and Apple Arcade. And finally, with over $200 billion in cash on hand and plenty of successful and profitable products on the market, Apple has the deep pockets needed to meet the high costs of content creation.
This is the background to AAPL’s year-to-date appreciation of 38%, well above the S&P’s 18%. AAPL shares are trading just $11 below their all-time high price, and the company’s market cap is hovering just below $1 trillion. The stock has momentum; it is up 11% in the last 30 days.
Jefferies analyst Kyle McNealy had all of this in mind when he upgraded his stance on AAPL yesterday. Bumping his outlook from neutral to buy, he said, “The Street underestimates Apple’s position for the 5G cycle and potential upside from additional mid-range volume driving Services expansion. Given the advanced technology and components involved, 5G devices will be high-end. Our analysis of market share by price level shows Apple’s share increases as prices go higher. We think the company’s Services opportunity is broadly underestimated by investors.” McNealy’s $260 price target suggests a 19% upside to the stock.
Writing from Piper Jaffray, 5-star analyst Michael Olson gives Apple a price target of $243 along with a buy rating. He also sees 5G as vital to the company’s long term, but believes investors will have to wait until 2020 to see the results. He writes, “We believe users upgrading their iPhone in the coming 12 months are less likely to buy a higher-end model with the promise of 5G devices on the horizon… For the remainder of FY19 and into FY20, we expect limited excitement around the iPhones shipped last week, however, as long as services revenue and non-iPhone devices continue to perform well, this should tide investors over until anticipation for 5G iPhones intensifies.” His price target implies an upside of 11% for AAPL shares.
The mix of bullishness and caution underlies Apple’s consensus rating of Moderate Buy. This is based on 33 reviews in the last three months, including 17 buys, 14 holds, and 2 sells. Apple shares sell for $217, and the average price target of $224 indicates a modest 3% upside.
Walt Disney Company
Like any strong edifice, the House of Mouse has a solid foundation. Disney (DIS – Get Report) has built an unmatchable reputation in the world of animation and children’s entertainment, and has in recent years acquired the Star Wars and Marvel movie franchises. In addition, like Apple, Disney has a diverse field of holdings, ranging from ESPN to Disney Cruises to the enormously popular Disney Princesses brand line. In its last fiscal year, Disney brought in $12 billion in net income from $60 billion in revenues.
This brings up Disney’s biggest advantage as it enters the streaming space in November. The company has six times Netflix’s net income, but can start a streaming service with a net content creation cost of $0. Disney can simply open its famous Disney Vault to subscribers, giving them more than 7,500 films to chose from, including some of the classics of children’s animation.
4-star analyst Douglas Mitchelson, of Credit Suisse, sees the upcoming Disney+ service as a big draw when it opens. He writes, “Disney is pricing in a 6m subscriber outcome for this December 31st, while at 8m subscribers by then investors see Disney at $145/share and at 10m subscribers they expect $155. The 10m subscriber level seems to be an inflection point for sentiment; 70% of investors would start new positions or add to existing ones there. Investors noted Disney’s streaming businesses are valued in the stock currently at $35b, but believe they are worth $47b.” Michelson’s $150 price target suggests an upside of 13% for DIS.
Wells Fargo analyst Seven Cahall is even more bullish. He writes, “Disney shares have not yet unlocked the full value associated with the company’s transition to streaming. We project Disney will reach 16 million Disney+ subscribers, 39 million Hulu subscribers and 5 million ESPN+ subscribers by the end of 2020.
“We believe the DIS’s beauty is that it’s a hub of content creation, with a formidable content engine that includes spokes of monetization from parks, consumer products, media networks, and DTC.” Cahall’s $173 price target on DIS indicates confidence, implying an upside of 31%.
Overall, DIS gets a Strong Buy from the analyst consensus, with 12 buys and 3 holds given in the last three months. The average price target of $156 suggests an upside of 18% from the current trading price of $132.
Visit our Analysts’ Top Stocks page, and find out which stocks have the full attention of Wall Street’s top analysts.
This author is long on AAPL.
