I also find this topic extremely interesting.
First let me start by talking about Netflix. Looking at the fundamentals they are a cursed stock.
Below average quality, their balance sheet makes no sense, they are spending with little upside (based on balance sheet.)
Everyone and their dog owns a share in Netflix, the value is horrific, honestly just painfully bad. They are extremely overprices based on their fundamentals.
Finally we have the future projections, these are pretty average compared to everyone else. Yeah they are predicted to make more money and bring in more customers, but in the grand scheme of everyone, they aren’t doing anything amazing.
Now the issue here is we know that Netflix is hot because they have broken ground, have excellent first party programs, have started partnerships (new comedy channel that isn’t exclusively on Netflix,) and they have some very VERY impressive technology.
15% of all internet bandwidth is for Netflix, that is impressive stuff. http://fortune.com/2018/10/02/netflix-consumes-15-percent-of-global-internet-bandwidth/
The issue is the fundamentals for Netflix are completely meaningless. For a lot of the FAANG the value of what they do is hard to put down on paper.
So let’s talk about Disney who are easier to analyse.
Same structure as before, this time however the quality is above average. Disney have cash to splash and they can do so without hurting the business. I’m not saying they could close down a business line over night and not notice, but these guys can weather a storm.
In terms of value, they are slightly below average as Disney is a large firm that has many business lines and different ways to generate revenue, it’s a safer bet than a firm that is focused in one area. Flip side is if one section does extremely well they probably have an under-performing area that is sucking up profits, but they can easily control that.
Finally what are the analysts saying, they have high hopes. Not the highest, again we are talking about above average, C+ territory. However this again is where having these wide business lines helps. Analysts could be saying this is going to be a flop (they aren’t) but that won’t impact the rest of their business.
Who will win?
Netflix uses technology to get an edge on the competition and to always stay one step ahead (remember they were A/B testing a new series by changing what the first episode was?) These guys live and breath innovation, they basically wrote the handbook on how to use AWS and to build the ultimate scalable machine. But does that mean they can fight against a major player when it comes down to exclusives?
Disney eat business for breakfast, they see something they like and swing in and take over. Disney entering any area is something to take note of, where they go others will follow. Disney has an extremely strong brand and lots of content they can produce. Whereas Netflix has started as tech and then gone into production, Disney is the production king who is now moving into tech.
That all said and done, I don’t believe Disney will create a huge dent in Netflix’s business. The pie is large enough to share and they can both easily find their own vertical. It will take a while for Disney to get to the same technical experience and overcome the same issues that Netflix has already faced. Also if the plan does bring any success it’s easy for Disney to back out shut it down and go back to 3rd parties. Or they can use this as leverage to do very lucrative exclusivity deals (think Star Wars when they forced cinemas to only show their stuff and no other major blockbuster at the same time.)
I don’t know if this will make Disney a more valuable company or a more attractive investment. They already have enough reasons for you to invest, this doesn’t really add much in my view.
This will however test the foundations of Netflix and give them a chance to prove themselves in gladiatorial combat.
If Netflix doesn’t suffer high churn and they can keep up their acquisition numbers with Disney on the block, then Netflix will get a very big gold star and it will deter anyone else from attempting the same move.
If Netflix suffers with this move, even if Disney doesn’t view the venture as successful, you can expect more big production firms to make the same move. Netflix will either use this to go into B2B to white-label their solution and help protect it’self, or they will focus on a vertical.
What am I doing about it?
I don’t have an investment in Netflix because it’s too expensive which makes it harder to make longer term gains. I have great respect for the company but I’m happy using my capital elsewhere.
As for Disney, they are too big a firm for me to invest directly in them. I stay away from conglomerates as a general rule.
While my funds do have exposure into both Disney and Netflix it’s not something I’ll be personally taking a direct investment view on.
Netflix has a lot to gain or lose. For Disney this is a nice experiment that many people will be watching.