It appears there is no longer going to be a “Happily Ever After” for Netflix, Inc. (NASDAQ:NFLX) when it comes to its partnership with Disney, after Disney took its initial stride to venture solo into the proprietary streaming content world. By the close of 2019, Disney will have completely ended its distribution agreement with Netflix, with the House of Mouse likely to gradually migrate all movies from Netflix over to its new Disney-branded streaming service.
Analyst Michael Pachter of Wedbush finds this move significant owing to that fact that Disney has not only captured 25% of the total U.S. box office, but Bloomberg assesses that 30% of domestic Netflix subscribers tune in for Disney programming on the platform. Considering that the video streaming giant does not yet produce enough of its own content to fill its expansive database, losing an account like Disney is troubling.
Adding to Netflix troubles, says Pachter, is the fact that nearly all prime movie producers, including HBO, EPIX, Showtime and Starz already have premium payment options in place. While the company may be able to procure some of that content, it may be cost prohibitive, not to mention that Hulu and Amazon are going to also get more “get more aggressive in bidding.” Furthermore, even if Netflix obtains the shows after the 8-year window closes, the content will not be worth much.
The question is: How can Netflix succeed after Disney ends the show? The analyst believes, “Netflix is at the mercy of content owners, and can only secure its future and justify its valuation if it successfully develops compelling owned original content […] As such, Netflix has roughly two years to attempt to fill the gap caused by Disney’s departure.” In the meantime, Pachter expects “roughly 10% of Netflix’s U.S. subscribers to migrate to the new Disney service and quit Netflix between mid-2019 and the end of 2020, resulting in the loss of roughly five million subscribers [with a further] major blow internationally as well, with Disney describing the new service as a global product, although existing international release windows were not provided.”
In conclusion, the analyst notes, “The loss of the Disney content highlights two things: first, content is king, and content owners have leverage over Netflix, not vice versa; second, Netflix currently licenses virtually all of its content (only a small handful of movies and television series are owned by the company), making it vulnerable to similar moves by other content owners.”
The analyst reiterates an Underperform rating on NFLX with a price target of $82.00 representing a 51% drop below current trading levels. (To watch Pachter’s track record, click here)
TipRanks analytics demonstrate NFLX as a Buy. Out of 31 analysts polled by TipRanks in the last 3 months, 21 are bullish, 1 is bearish, while 9 remain sidelined on Netflix stock. With a potential upside of nearly 15%, the stock’s consensus target price stands at $193.83.