Wall Street expects Netflix to dominate the streaming war in 2019 even after its biggest price hike
- Wall Street expects Netflix to succeed in a crowded streaming market in 2019, even as more competitors, like Disney and AT&T, enter the field.
- Netflix increased prices this week, but some Wall Street analysts are optimistic that the price hike will be successful.
- Analysts said that traditional TV viewership is declining and that Netflix's push into international markets will give it a boost.
- But Netflix will also have to rely less on licensing agreements as original content becomes more and more essential.
Netflix could face one of its toughest years yet in 2019 as more services from the likes of Disney and AT&T enter the streaming war.
But the overall Wall Street consensus is positive going into Netflix's Q4 earnings on Thursday, with analysts seeming optimistic about Netflix's recent price hike and the streamer's chances against the competition this year.
Many analysts anticipate good news on January 17, when Netflix will report its earnings for the last quarter of 2018, even after Netflix increased its prices on Tuesday, effective immediately for new subscribers and within three months for current users. It's increasing prices by 13% to 18%, and its most popular plan will see the biggest hike, from $11 to $13.
Stifel was optimistic that Netflix could execute the pricing increase in a report released on Tuesday, but was cautious on domestic subscriber additions in Q1 of 2019. Instinet sees the price hike having short-term effects on subscriber growth, but doesn't "see it as a long-term detriment," analysts said in a Tuesday report. And analysts from RBC said that the increase "has a high probability of success, further fueling the Netflix flywheel," in a report released Tuesday.
'We see the potential for upside...'
For Q4 of 2018, Stifel expects that Netflix gained 2.035 million subscribers domestically, which would exceed Netflix's own projection of 1.8 million. Internationally, Stifel estimates that Netflix gained 7.757 million subscribers.
UBS sees an upside in Netflix's Q4 subscriber growth, due in large part to positive download trends of the company's mobile app and strong search trends.
"We see the potential for upside to Q4 domestic and int'l sub guide given solid app download ranking, credit/debit card spend, & OTT consumption data, Google search trends (pointing to a well-performing Q4 slate) and 3rd party data," UBS analysts said in a Thursday report.
"Emerging markets in Latam & Asia (e.g., India) are the bright spots on local language content push," UBS continued.
Netflix announced 17 new Asian original programs in November in an effort to break through, since the company had yet to exceed 2 million subscribers in any Asian market. Of the 17 originals, most hailed from India, where Netflix is fighting hard to gain traction since it can't operate in China without a local partner.
"We expect subscriber momentum will continue as Netflix continues to improve its service and the global shift to streaming broadens and given the strong 2H18 growth performance," Credit Suisse analysts wrote in a report published on Thursday.
Netflix is expected to have a solid 2019 even as more competitors emerge
Disney is expected to launch its own direct-to-consumer service in late 2019, called Disney+, and Morgan Stanley analysts said in a report on Friday that they believed Disney could succeed in the the crowded streaming market. But the analysts also said three factors kept them positive that Netflix could, as well.
"First, we believe Netflix's opportunity comes from the nearly $500bn global TV market, of which total subscription OTT still represents less than 5% of revenues," Morgan Stanley analysts said. The analysts said there could be multiple winners in the streaming video (SVOD) space, and that linear TV viewership would continue to decline.
The Morgan Stanley analysts predicted most traditional TV/studio owners would not pivot to streaming, and instead opt to "live in the studio side of the streaming value chain, producing exclusive first-run content for Netflix, rather than launching global branded streaming platforms."
Netflix will rely less on licensing agreements
Netflix will continue to transition away from licensed content and toward its own originals in 2019.
Original content will be more important than ever as more streaming companies throw their hats in the ring. Even though Netflix has invested heavily in original programming over the last year, some of its most popular shows, like "Friends," are still available through licensing agreements.
Netflix and AT&T, which bought Time Warner last year, recently agreed that "Friends" can remain on Netflix through 2019, but that AT&T would also be allowed to have the popular sitcom on its own streaming service when it launches this year.
Disney also ended a deal with Netflix last year, and all of its content starting with "Captain Marvel" will be available on Disney+ after leaving theaters.
Morgan Stanley analysts pointed to a shift toward Netflix originals, which it said was evident in Netflix's financials.
"First, the growth in licensing obligations to third parties has slowed, declining ~15% YoY on a per sub basis in 2018," the analysts said. "This is a function of licensing commitments burning off faster than they are being taken on as the business grows. Second, cash spend on content not tied to pre-existing obligations - a rough proxy for in-house production - has ramped to over $5bn in '18,nearly doubling YoY to ~40% of annual cash content spend."
Netflix was trading around $351 per share on Wednesday.