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Jan. 22, 2020, 11:43 a.m. EST

Netflix earnings don’t solve riddle of what Disney competition means

Analysts are split on whether Netflix is withstanding new competition well or setting itself up for trouble

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By Emily Bary

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Netflix shares dropped after the company posted a disappointing subscriber forecast.

Netflix Inc. is no doubt feeling some pressure from the recent launch of Disney+ and other new video streaming services, but gauging the competitive impact is complicated.

The streaming giant’s latest results were met with a tepid reaction from Wall Street, with shares down 2.3% in Wednesday morning trading after the company beat global subscriber estimates for its holiday quarter but gave a disappointing subscriber forecast for the beginning of 2020. The company attributed its “low membership growth” of about 400,000 subscribers in the U.S. last quarter to pricing changes and “U.S. competitive launches.”

Bulls zeroed in on Netflix’s /zigman2/quotes/202353025/composite NFLX +2.38%  strong international performance while arguing that Disney+ fears are overblown.

“Netflix US subs responded to the Disney+ launch by watching more Netflix,” wrote Bernstein analyst Todd Juenger, who rates Netflix shares at outperform and bumped his price target up to $423 from $415. “With very little new original Disney+ content over the next several quarters, we think consumers will be reinforced in their appreciation of Netflix’s unique value proposition: ‘always something new to watch.’”

Read: Netflix changes its view on ‘views,’ which will boost its numbers by 35%

During Netflix’s earnings interview after its results, Chief Financial Officer Spencer Neumann said that the company’s “per-membership viewing” grew in the U.S. as well as globally in the fourth quarter, which to him suggests that the company’s growth continues to come at the expense of traditional television, muting the impact of new competitive offerings.

Bank of America analyst Nat Schindler said that Netflix’s domestic performance will be a target for bears going forward, but he has more confidence in the company’s advantage overseas even though Netflix faces competitive pressure all over.

“We see Netflix’s international growth as insulated from competition, given the big investment in local-language content, Disney+’s staggered launch, lack of Disney-Hulu bundling, Netflix’s mobile-only plans, and lack of HBO Max/Peacock launch timeline,” he wrote. “We note Netflix management citing increased year-over-year viewing per U.S. membership and little post-Disney impact in [Australia, New Zealand, and Canada].”

He rates the stock a buy with a $426 price objective.

Others were less optimistic about Netflix’s overall positioning, with Needham’s Laura Martin suggesting that the so-called streaming wars can manifest in more than just the company’s subscriber numbers, highlighting spending pressure as Netflix confronts the competition.

“Netflix projects that its total global content spending will rise to about $18 billion in 2020, up 20% vs $15 billion in 2019, of which over half will be spent on originals with local language titles doubling in 2020,” Martin wrote. “This compares to projected streaming investments of $1 billion to $2 billion each for Disney+, HBOMax and Peacock in 2020. By implication, Netflix is spending seven times to eight times more each year to compete, suggesting inferior [returns on investment] versus alternative content creator investment alternatives.”

She rates Netflix shares at underperform.

Opinion: Netflix investors need to get used to the new normal

The mixed reactions to Netflix’s report could be seen in analysts’ price-target activity following the results: At least seven raised their targets, while four lowered theirs. The average price target listed on FactSet is $369.88, 12% above current levels. Of the 43 analysts tracked by FactSet who cover the stock, 27 rate it a buy, 11 rate it a hold, and five rate it a sell.

Netflix shares have gained 23% over the past three months, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.46%  has risen 11%.

US : U.S.: Nasdaq
$ 478.04
+11.11 +2.38%
Volume: 3.53M
Aug. 12, 2020 2:55p
P/E Ratio
Dividend Yield
Market Cap
$205.92 billion
Rev. per Employee
+48.73 +1.46%
Volume: 1.55B
Aug. 12, 2020 2:55p

Emily Bary is a MarketWatch reporter based in New York.

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