Apple's battle with Netflix & Disney over the streaming market

Following the Apple Event on Tuesday this week, we have another heavy-weight new arrival to the already competitive streaming market. Both Netflix and Disney see content as the key to their survival whereas streaming may only ever be a small portion of Apple’s revenue. But given Apple’s huge war chest and customer base, could they be about to upset the cart for Netflix and Disney?

Billions of dollars are being spent to reshape the landscape of media and entertainment. According to The Economist, Apple has poured around $2bn into creating original shows, featuring some of Hollywood’s most famous stars, for their newly launched streaming-video service Apple TV+. Meanwhile Amazon is thought to be spending more than $5bn a year on content through Prime Video. The most established incumbent in streaming, Netflix, is expected to about $15bn this year alone on its content in order to stay competitive with its would-be rivals before they get fully up and running.

And the melee is unlikely to scale back any time soon. In recent years, several major players in the Telecoms industry, such as AT&T, Comcast and Disney have spent a total of $215bn on acquisitions of, respectively, Time Warner ($104bn), Sky, and much of 21st Century Fox ($71bn). Each is expected to provide new streaming services that will launch by 2020. With all of the new streaming-TV services about to make their debut, viewers around the world will be more tempted than ever to unplug their cables and get online.

What does this fundamental change in the way people consume entertainment mean to these service providers, especially over the long term? And how will the increasingly competitive landscape of streaming service affect their business model and future stock price?

To attempt to answer this question we have applied our proprietary stock ranking methodologies to some of the key players; Apple, Walt Disney and Netflix. We evaluate many different aspects of each company to provide a quantitative perspective in three broad categories: quality (which measures the soundness of the business operations), value (relative cheapness of the stocks), and momentum (which quantifies market expectations for the stocks).

From the “quality” perspective, both Apple and Disney are highly ranked in our “profitability” assessment, respectively sitting in the top 5% and 10% of our universe of 6,600 global stocks. On the other hand, Netflix ranks toward the lower end of the scale (bottom 50%) in the same category of factors, due to its significantly lower net income, relative to other stocks in our stock universe. After all, both Apple and Disney have multiple revenue streams and a more diversified range of products and services, whereas Netflix relies on a simple subscription model only, for its original and licensed content.

All three companies rank relatively poorly on the “value” front (all are ranked in the bottom 30%), which reflects their high flying market prices relative to some of the key fundamental metrics for the companies, such as cash flow generated, which make them seem overvalued rather than a bargain. This is perhaps not a surprise given all three companies dominance of their respective industries.

As far as the stock’s momentum is concerned, this is arguably the most affected factor by the recent developments in the streaming industry and would likely to be the key driver behind the movements in these companies’ stock price over the short to medium term.

According to the result of our analytics and intelligence, over the past 3 months 70% of analysts who covers Apple Inc upgraded their rating of the stock, compared to 6.5% who downgraded their ratings of the company’s future prospects. The same statistics for Disney and Netflix are 3.8% and 80.8%, and 18.2% and 72.7% respectively.

These figures showed that financial institutions such as brokerage firms and banks, are getting increasingly concerned about risk and the competition facing Disney and Netflix as the results of new entrants to the streaming industry and the knock-on impact to their future profitability. The change in the stock’s momentum, can already be seen in their recent stock prices, where Disney and Netflix dropped by 3.6% and 23% respectively since the end of June 2019. Clearly the prospect of the streaming war is placing a large shadow over Netflix.

Indeed, investors of Netflix are right to worry that consumers may have enough choice of alternative streaming services to justify ending their Netflix subscription. Many of these streaming service providers aim to lure viewers over to their platform with extremely competitive pricing in the beginning (Apple TV+ only charges $4.99 p/m compared to Disney + and Netflix’s $13 p/m) and then gradually increase prices over time, just as Netflix has done and cable TV networks did over the decades. However it’s possible that Apple won’t increase their prices because it could view the service as marketing for it’s devices and they may decide to continue to subsidise the cost.

This is just the beginning of the ‘streaming wars’ and each of the providers have deep pockets so their strategies could change a lot over the next few years. Fortunately we can get a sense of who’s best positioned at the moment, based on the companies performance. Let me know who you think will come out on top in the replies.

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