Disney (NYSE:DIS) announced a streaming service that sent the stock sharply higher. The break-out from the $108 - $115 range is well-deserved: Disney may monetize its massive library of content just like Netflix (NASDAQ:NFLX) did. The difference is that Disney did not take on debt to grow its content.
Disney+ will cost just $6.99 a month, well-below that of the Netflix monthly rate. This is a blow to Netflix, because recent price hikes to help pay down debt may backfire. Previously, Netflix enjoyed strong customer retention and could pass the higher costs of acquiring original content to them. But with more choice stemming from Disney+, HBO, and others like Roku (NASDAQ:ROKU) and Amazon.com’s (NASDAQ:AMZN) Prime, NFLX stock could fall further.
On the flip side, Netflix may not lose subscribers if consumers sign up for Disney+ and do not cancel. In this scenario where it is not a zero-sum game, both players come out ahead. One thing is still certain: Netflix will now have limits in how much it may raise prices moving forward.
Takeaway
DIS stock at 18 times earnings is still below fair value but those who bought the stock before the news may enjoy the easy money. Netflix risks falling further and may underperform for the rest of the year as uncertainties over cash flow growth mount.
