Talking Stocks: A Netflix Inc. Update
Is this still a good investment?
With the ridiculously high levels of pessimism this company has received, its strength against so-called “dominating” competitors has become more prominent each day.
TDP’s last article on Netflix emphasized its positive aspects at a meager price of $293 per share; and considering the fact that the company last closed at over $380 per share last week, a second examination into the underlying fundamentals may be required.
Without further ado, here are several aspects that have sustained Netflix's business and may push them even further in the next several quarters:
1. Growing Content
Given the rise of the “consumer experience”, the growing content available on Netflix’s platform is likely to bring in a further range of users through its diversity as well as its inclusivity. It caters to a wide range of audiences whilst simultaneously creating attraction from different parts of the globe.
According to multiple research, Netflix has still held its spot of achieving the highest satisfaction from original content: which is why we can imply that their $15 billion content expenditure may be starting to pay off. Consider the figures below:
Figure 1-2: Netflix’s favorability compared to other streaming services
Source: (Statista, 2019)
As articulated above, the level of satisfaction attained by users remains high due to the personalized and continuous level of content creation. With an average of 4 new TV series and 1 film each month, Netflix is overthrowing their cash-heavy competitors with the level of value being provided to consumers on a regular basis.
While the debt cycle is perpetuated here – I.e. the company continues to borrow truckloads of cash to fund their content creation – it seems plausible that the value of original content will mostly outweigh the principal costs of production.
This is supremely why Netflix is a differentiated service, and why their prioritization of original content gave - and still gives - them a competitive advantage in the streaming market.
Key Point: Investors may need to keep a close watch on the rate of Netflix's spending, as this should not exceed the company’s rate of revenue growth too significantly. If it does, it gives rise to uncertainty as to whether Netflix’s earnings will be able to catch up with its unflinching habit of burning through cash.
2. Poor Performance of Main Competitors
Another aspect that turned investors from bearish to bullish on Netflix (i.e. believing that the stock will go down versus up) was the fact that its new rivals were not as dominating (in their first few months) as the community thought they would be.
Major players that recently entered the market include Disney+ and Apple TV+, both of whom now have 33.6 million and 26.8 million paying subscribers each. While these are relatively impressive statistics, it is still far from the stage of completely dominating Netflix.
This is – in part – due to the fact that the two aforementioned platforms have nowhere near the range of content that Netflix has: as Netflix can satisfy the 6th grader after their homework, the university student after studying, the banker after a long week and the retiree on vacation.
It caters to such a broad spectrum that the difference in subscribers is likely to sustain its dominance for the foreseeable future.
Especially with Disney+, it is important to consider the fact that it mainly provides content for young people, and this on its own is seldom likely to overthrow Netflix in the way many individuals thought it would.
3. Potential Profitability
For the figurative cherry on top, Netflix has teased us with a hint of consistent profitability in the near future, and this is likely to have profound effects on the stock price going forward.
Figure 2: Growth of Netflix's Profitability (Red)
Source: (HyperCharts, 2020)
As depicted in the figure above, Netflix’s operating income (net profit) has been increasing steadily in the last 3 years, with profits estimated to continue growing, unless any drastic changes in the market occur.
Due to this improved profitability, we can imply that Netflix has a chance of becoming cash flow positive (i.e. cash coming in > cash going out), and this will make operations far easier to conduct as the company will finally be able to rely less on debt capital. The impact of this may be largely positive from the investing community, and we can assume this through the recent Tesla phenomenon.
Tesla has had its fair share of controversy in the market, but as soon as profitability became positive and cash flows began to increase, we saw a massive reaction that resulted in the stock price quadrupling within six months. If Netflix achieves the same feat, is it ridiculous to assume that Netflix could follow a similar path?
So…who is this stock for?
Given the uncertainty with this stock, it is always more optimal to assume that volatility will be incurred here, and investors need to be prepared for that.
But considering our argument above – the fact that Netflix still have the highest satisfaction levels, their competition is not as threatening as we once thought, and their profitability/cashflows are improving – a handsome reward on the other side seems quite plausible.
Results in the next few quarters will likely define the future path of this company, and given that almost all of us likely hold a Netflix subscription, it may be time to add some Netflix stock to our name too!