Netflix Q4 Earnings: Will Disney+ Slow March Toward 160 Million Subscribers?

“There is large industry concern that Disney’s service will rob some of Netflix’s subscribers,” Parks Associates analyst Brandon Riney says

Have new streaming competitors slowed down Netflix?

That’s the main guidepost analysts and investors will be watching for on Tuesday afternoon, when the streaming heavyweight shares its fourth-quarter results. Both Disney+ and Apple TV+ launched during Netflix’s Q4. Their arrival comes after a number of media companies gave Netflix years to build its streaming lead, with Netflix entering Q4 with more than 158 million global customers. Now, as 2020 continues to unfold, Netflix will soon be fighting several other new services, including NBCU’s Peacock, HBO Max, and Quibi for viewers’ attention.

That’s a matter for later, though. Netflix has typically enjoyed strong Q4 subscriber growth in the past, thanks in large part to releasing its big-budget movies and trademark shows during the holiday season. This most recent quarter was no different, with critically-acclaimed films like “The Irishman,” “Marriage Story” and Eddie Murphy’s “Dolemite Is My Name” hitting Netflix, coupled with the return of fan-favorite shows like “The Crown” and “You.”

Can Netflix continue to extend its streaming lead while its rivals work to find their footing? We’ll find out more on Tuesday. Here’s what three analysts will be watching for when Netflix reports:

A Disney-Sized Dent? 

As usual with Netflix, subscriber count tends to be the primary focus each earnings call. Analysts will be especially focused on this all-important metric on Tuesday, as they look to see if any Netflix subscribers ditched their service at the same time Disney+ hit the market.

“The big question regarding Netflix’s upcoming earnings call is certainly centered around the impact that Disney+ has on Netflix’s domestic subscriber count [and] growth,” Parks Associates analyst Brandon Riney told TheWrap. “There is large industry concern that Disney’s service will rob some of Netflix’s subscribers.”

If that were to happen, it would obviously be a gut punch for Netflix. Its stock price often rises or falls based on whether it tops analyst subscriber estimates, and we’ve recently seen what happens when it unexpectedly loses subscribers. Netflix, for the first time ever, lost domestic subscribers, during Q2 2019, with the company blaming the subscriber exodus on recent price hikes. Its share price dropped 10% immediately after. Netflix’s stock has since rebounded, trading at about $340 per share heading into earnings, but an underwhelming quarter when it comes to subscriber growth could once again push its shares down. With Disney+ continuing to rollout abroad, a dent in Netflix’s international subscribers isn’t likely, but another quarter of poor domestic growth would spook Wall Street.

Riney said this is an unlikely event, at least when it comes to Q4. He said Disney+, because of its mountain of family-friendly content, “better stands to supplement” Netflix than completely pull subscribers away. Pointing to Parks Associates research, Riney said Netflix is fairly entrenched as a must-have streaming service for Americans; 50% of all U.S. streaming households have multiple streaming subscriptions he said, and of those households, 81% use Netflix plus another service like Amazon Prime Video or Hulu.

“While there may be a small number of Netflix subscribers that cancel due to their sole desire for Disney content being moved exclusively to Disney+, Netflix is poised to combat any of those losses with its own content,” Riney added.

Goldman Sachs analyst Heath Terry is also bullish on Netflix, writing in a note to clients this week he anticipates the company added 9.7 million new customers during Q4 — a figure that would narrowly top Netflix’s company-record of 9.6 million new subscribers set during the first quarter of last year.

Keep an Eye on Debt

Netflix is swimming in debt. The company’s total liabilities, including long-term debt, was more than $24 billion according to its last quarterly report. To this point, investors haven’t cared much, as long as the company keeps growing.

To add to its massive content offering, Netflix has spent far more than its competitors on shows and movies, with about $15 billion earmarked for content in 2019. Terry, in his note to clients, said Netflix’s spending likely didn’t slow down as 2019 came to a close, as the company looks to continue adding shows to appeal to customers outside the U.S.

“We believe Netflix substantially accelerated cash content spending in [Q4], similar to [Q4 2018], which should continue to drive incremental subscriber growth given the high correlation between content and subscriber additions,” Terry said. “For reference, we expect [Q4] cash content spend growth to accelerate to 33% [year-over-year] vs. 18% on average in the first three quarters as the company continues to expand its global content offering as it faces more significant competition.”

Expect Netflix’s debt to grow as its content spending rises, but don’t anticipate investors knocking the stock unless it comes with lukewarm subscriber growth. Terry placed a $450 per share price target on Netflix by the end of the year.

Where Are New Subscribers Coming From? 

International growth is increasingly important for Netflix. It’s inching towards a saturation point in the U.S., with more than 60 million domestic accounts entering Q4; add in Canada and its at about 67 million subscribers.

To get investors to focus more on global growth moving forward, Netflix last month shared for the first time ever a look at its performance in several international markets. Here’s a look at the subscriber count in its three non-U.S. markets:

  • Europe, Middle East, and Africa (EMEA): 47.4 million
  • Latin America (LATAM): 29.4 million
  • Asia-Pacific (APAC): 14.5 million

Netflix is expected to share an update on these figures on Tuesday. Stifel analyst Scott Devitt, in a note to clients this week, said he sees plenty of room for growth.

“We view the opportunity as particularly compelling in the EMEA and APAC regions, where Netflix’s penetration stands at 19% and 11% [of the market], respectively, below the current 55% level in the U.S. and Canada… and 39% in LATAM,” Devitt said.

courtesy of Stifel

To pull in more subscribers outside the U.S., Netflix has started to produce more original series aimed at these markets. Last year, Netflix had 368 non-English language original series dedicated to these three markets — up nearly 40% from the year prior.

CEO Reed Hastings — who has said in the past he could see Netflix’s next 100 million subscribers “coming from India” — is clearly focused on expanding Netflix’s worldwide footprint. We should get a better look at how that plan is going on Tuesday.

Trey Williams contributed to this report. 

Sean Burch

Sean Burch

Tech reporter • • @seanb44 


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