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Netflix's Worst Nightmare Is Coming True
Thursday, December 13, 2018 04:30 PM
By: Stephen McBride
I’ve been warning to keep money out of stock market darling Netflix (NFLX)
for quite a while.
This was not a popular thing to say when I first wrote it in July.
Back then, Netflix was the hottest stock on Wall Street. It had surged 107
percent in six months, hitting record highs.
But it turns out July was the right time to sell Netflix. Since then it has
crashed 37%:
Netflix’s Best Days Are Over
You can review my reasoning for why Netflix is doomed here and here. It
comes down to the lifecycle of disruptive businesses.
Netflix pioneered “streaming” video where you watch shows through the
Internet rather than on cable TV.
For years, it was the only streaming service in town. Early investors rode this
first-mover advantage to 10,000 percent gains from 2008 to July of this year.
Today I see three other companies in the same position Netflix was back in
2008.
But for Netflix, the era of almost zero competition is over.
It’s now coming up against powerful rivals like Disney (DIS) — which I
recommended you buy in July.
31/12/2018, 11:33 AM
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Disney will launch its own streaming service called “Disney+” next year. It’s
going to pull all its shows and movies off Netflix and put them on Disney+
instead.
This is a huge problem for Netflix because Disney has the world’s best
content by a long shot. It owns household brands like Marvel… Pixar
Animations… Star Wars… ESPN… ABC… X-Men… not to mention all the
traditional characters like Mickey Mouse and Donald Duck.
When it launches next year, Disney+ will be a no-brainer purchase for most
families. I’ll certainly be subscribing for my daughter.
Meanwhile, Netflix will lose a lot of its best content… and potentially millions
of subscribers who switch to Disney+.
Amazon Is Gaining a Foothold in Streaming, Too
In February, Amazon (AMZN) announced it would spend $5 billion
developing original shows and movies this year. In response, Netflix upped
its spending by 50 percent.
Netflix had planned to spend $8 billion on shows and series this year… now
it’ll spend roughly $12 billion. It now invests more in content than any other
American TV network.
Keep in mind, Amazon is the third-largest publicly traded company on earth.
It has much deeper pockets than Netflix or even Disney.
To have any hope of keeping up with its rivals, Netflix must keep ramping up
its spending on content.
Problem is, it can’t.
Netflix makes only a small profit, so it’s had to borrow gobs of money to fund
its show creation. Its debt has exploded 71 percent in the past year to $8.3
billion.
That’s not sustainable.
Now, Netflix has three bad choices: continue borrowing billions and bury itself
deeper in debt… dramatically raise its subscription prices… or cut back on
making new content.
I Recommend Disney
Netflix traded at $400 when I first sounded the warning…
It has dropped to around $275 today. And as I mentioned last time, my
research shows it’s worth $190–$200 a share, max.
So, Netflix is still a “no-touch.”
Disney, on the other hand, has gained 11.5 percent since July and hit multiyear highs earlier in November. That’s more impressive given that most
stocks have struggled in the last few months.
Disney is still a great buy at today’s price of $116. My research shows it’s
heading for $170 — roughly 45 percent higher than today.
Stephen McBride is the editor of the RiskHedge Report, a popular and
rapidly growing advisory dedicated to helping investors understand and profit
from disruption.
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