(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS and NFLX.)
At first blush, one might think Disney creating a streaming media giant to rival Netflix would be negative, but that is just not the case. Netflix stock was buoyed by the news and closed at $189.56 a share, up $1.70, or 0.90%, on healthy volume of 7.68 million shares. Average daily trading volume is 6.8 million.
The streaming media landscape is not a zero-sum game. There will not be winners and losers; it will be a game of those that are a force and those that dominate. The consumer will not choose between having Netflix or Disney services; it will be about having both. Disney's acquisition of Fox and its strong push into streaming content validates the Netflix business model of creating and controlling the distribution of content. (See also: Disney-Netflix Divorce Signals Death of Cable.)
Shares of Netflix broke out early in Thursday's trading session, touching resistance at around $190. The breakout came on a surge in volume, helping to confirm the breakout.
A Rise To $205
Although a rise to $205 will not be immediate, it could happen over the next couple of weeks, should NFLX stock continue to trade within its longer-term trading channel, which has been in place since June 2016. Netflix stock rallied out of that channel in October 2017, and now moved firmly back into the middle of that channel.
Content Is King
Content is king. And those that control the content win because consumers will flock to them, and will be willing to pay for the content from multiple sources. Most investors have failed to pick up on this for some time, as evidenced by Disney's stock price that merely became too cheap, as the albatross of ESPN blinded investors.
Meanwhile, investors were so focused on the number of subscribers that Netflix was adding on a quarterly basis that they failed to see what Netflix was genuinely building, which is an ecosystem. Companies like Disney helped subsidize this, by giving Netflix the content it needed to get off the ground to gain those initial subscribers. (See also: Why Disney Stock Looks Cheap Given Growth Outlook.)
Netflix is in a unique position as the clear-cut leader in an evolving streaming media landscape. Netflix is creating content and building an ecosystem where consumers can now find all of their favorite Netflix shows. More than that, it is developing into a media giant that will continue to dominate the streaming landscape. And Disney's aggressive and robust move into that space is not a threat; it's just a validation of Netflix's success.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.