Walt Disney, Netflix Stocks Drop on Streaming Deal News

Disney's decision to pull movies from the streamer "arguably reduces the consumer value of Netflix," says one analyst, while another says Disney faces a period when earnings growth "will be diluted by investment."

The stocks of Walt Disney and Netflix fell more than those of their peers in early Wednesday trading as Wall Street observers discussed the impact of late Tuesday's news from the Hollywood giant that it would end its Disney and Pixar movies licensing deal with the online video giant and launch a streaming service of its own.

U.S. and global stocks opened lower Wednesday after U.S. President Donald Trump warned North Korea about facing "fire and fury" if it doesn't stop threatening the U.S. The broad-based S&P 500 stock index opened about 0.3 percent lower.

The stocks of Disney, which also posted weaker-than-expected quarterly revenue after Tuesday's market close, and Netflix fared worse though. Netflix's stock in early Wednesday trading was down 3 percent at $173.01, while Disney's stock was down 4.6 percent at $102.10. 

Amazon, whose streaming service is also affected by a new Disney competitor, saw its stock drop only 0.6 percent in early trading. Among other entertainment giants, Viacom shares dropped 2.5 percent, 21st Century Fox's lost 2.0 percent, CBS Corp.'s stock fell 1.6 percent and Time Warner's stock was down only 0.1 percent. 

Analysts said Netflix's stock was under pressure given the popularity of Disney films and the potential that more entertainment companies could stop licensing their content to the streaming giant. Disney's decision to end its licensing deal "arguably reduces the consumer value of Netflix, which remains the biggest strategic challenge to linear networks in the expanded basic bundle long term," said Credit Suisse analyst Omar Sheikh in a report.

Disney CEO Bob Iger on Tuesday touted the growing opportunity for direct-to-consumer services, but didn't have many specifics to share about the planned Disney streaming service's pricing and the like, but said the company would also invest in original content for it. 

Wells Fargo analyst Marci Ryvicker said the lack of specifics made it hard to gauge the financial impact of the move, while other analysts said Disney's earnings would see a negative near-term impact from investments in the streaming service launch.

Discussing what the move means for Disney, Sheikh lowered his 2017 and 2019 earnings per share estimates and his stock price target by $5 to $120, but maintained his "outperform" rating. "Disney's decision to shift its distribution strategy toward a direct-to-consumer model leans into the accelerating shifts in video consumption," he argued. "Ahead of us we now have a period when earnings per share/free cash flow growth will be diluted by investment, but we believe the company is laying the groundwork for a stronger future strategically."

Said FBR analyst Barton Crockett: "Disney is not giving much guidance yet on the direct push, but we see a measure of earnings per share pressure as the investments ramp up. Netflix will applaud this as pushing the consumer more toward streaming, thus helping Netflix. However, we see this as negative for Netflix: More options for the consumer have to limit Netflix's pricing leverage and constrain its market opportunity as some consumers might be happy with Disney for online entertainment, instead of Netflix."

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