GettyWorries that Netflix Inc. will get knocked off its perch by Walt Disney Co., which is spending over $50 billion to arm its forthcoming streaming service with 21st Century Fox Inc.’s film and TV entertainment assets, are overblown, said analysts at Evercore.
Lead analyst Anthony DiClemente estimates that a combined Disney DIS, -1.90% and Fox entertainment FOX, -1.48% FOXA, -2.25% company would spend more than $11.5 billion a year on content, excluding sports and film, which is nearly four-times the $3 billion Netflix spends.
But DiClemente said there are factors working in Netflix’s favor to that should mitigate investors’ concerns.
Netflix’s stock NFLX, +0.96% was little changed in afternoon trade Monday, but has gained 1.2% since the Disney-Fox deal was announced.
“We expect Netflix’s rapid international expansion to bring content spend levels to near parity with the combined entity sometime in 2020,” DiClemente wrote. “We would also note that if the Sky transaction is not approved by the European regulators, Netflix would hold a substantial content scale advantage over the new Disney entity internationally.”
21st Century Fox has been trying to take over Britain’s Sky PLC for over a year.
Though a Disney-Fox tie-up would likely increase content costs, DiClemente wrote that competition only validates the market and likely drives more subscribers to online TV services. He noted that Netflix’s domestic subscriber growth in 2017 is expected to be roughly flat with last year, despite 2017 being the most competitive year for subscription video on demand services, with a number of new entrants.
FactSet, MarketWatchFinally, DiClemente argues that Netflix has achieved a greater return on its content investments, measured by hours viewed. Since 2015, Netflix has driven monthly viewership hours up 30%, while Disney has seen TV viewership decline 20%, not including sports, and viewership for the Fox assets Disney would acquire has dropped 12%.
In the year to date, Netflix shares have gained 54%, while Disney shares are up 6% and Fox shares are up more than 25%. By comparison, the S&P 500 indexSPX, -0.08% is up more than 20% and the Dow Jones Industrial AverageDJIA, -0.11% is up nearly 25%.