Tech sector investing can often run the gamut from names with proven track records and steady growth rates to wing and a prayer operations whose main attraction is the promise of future profitability.
And while Netflix (Netflix Stock Quote, Chart NASDAQ:NFLX) is hardly the full-on gamble that some startup investing might be, it’s still the case that a tonne of forward earnings are baked into the stock, says Barry Schwartz, chief investment officer for Baskin Wealth Management, who argues that a better play in the streaming sector might be Disney (Disney Stock Quote, Chart NYSE:DIS).
“There are so many of these subscription companies that are trading at obscene multiples, whether it’s Shopify in Canada or Netflix or this one that went public the other day, Zoom,” said Schwartz to BNN Bloomberg on Monday. “To buy them here, you really have to believe that they’re going to be enormously profitable and grow into their valuation.”
“If you’re going to buy Netflix here, number one, you’re going to have to assume that they’re going to continue to raise prices, from $12.99 a month to $20.00 a month, you have to assume that they’re going to continue to make inroads and acquire more subscribers and you have to assume that they’re going to slow down the spending, that they’re going to somehow figure out that they’re spending too much money,” he said.
Netflix, which will report its second quarter earnings on July 17, has both impressed and disappointed over recent quarters, notably on the key indicator of subscriber additions. Last summer, a dip in subscriber growth both domestic and internationally led to a selloff in the stock, whereas over the past two reported quarters, in January and April, Netflix has beat analysts’ estimates for paid subscriber additions.
Yet although still up for the year so far, NFLX has been fairly rangebound for much of 2019, even as the battle over the streaming space heats up. Disney, on the other hand, which is set to launch its Disney Plus service this fall, has attracted investor attention and is currently up over 26 per cent year-to-date.
Schwartz says Disney is the more conservative play, as the company has a slate of offerings aside from streaming.
“We’re playing streaming through Disney, which is a profitable company. We really want to own profitable companies and Netflix to us is not profitable, so we don’t own the stock,” says Schwartz.
“Netflix, meanwhile, what an amazing company. Everybody I know subscribes to it and I haven’t heard anybody say, ‘I’m dropping Netflix, it’s terrible, they’ve got nothing to watch,’ he says.