By Robert Bacarella | November 22, 2019
Netflix’s stock has recently underperformed the overall market as investors became increasingly concerned about growing streaming competition, slowing subscriber growth, higher corporate debt levels and spends more money than it takes in, as the company increases investments in original content shows and marketing related expenses. In addition, the planned launch of Disney+ is ushering in a whole new era of streaming competitors.
Some investors are concerned that Netflix could see a dip in streaming subscribers as people test out these new services, i.e., Disney+, Apple TV Plus and AT&T WarnerMedia. This clash is colloquially being referred to as the “streaming wars.”
Despite investor trepidation about Netflix growth, we believe the company isn’t in any real danger. For one thing, Netflix’ management team has successfully navigated major inflection points in the past. The company became a household name by renting DVDs through the mail. Management quickly identified the limitations of this business model and transitioned to the emerging streaming TV market, delivering content in a matter of milliseconds, rather than business days. Next, Netflix’ management successfully embarked on a quest to develop and stream high-quality original content.
Now, Netflix is producing more original programing than any of its competitors. Combine that fact with the size of its subscriber base—more than 150 million paid subscribers—and it’s clear the company is a true household entertainment centerpiece. We believe amazing content and new original programming series drive subscriber growth—as you may yourself know if you binge-watched and became addicted to “Stranger Things” or “Orange is the New Black.”
A key question is, will people abandon their favorite shows to subscribe to other services? We don’t think so, but the loss of Disney’s content and titles such as “The Office,” ”Friends,” and “Parks and Recreation” will have a short-term impact. Longer-term, we believe that it is original content programming that drives subscriber growth and Netflix is the “King of Content.”
Is Netflix a flower or weed to be pulled out of your portfolio?
The worldwide streaming market is far from being saturated. On a worldwide stage, Netflix represents approximately 1.3% of the international market and about 18% of the domestic market. Domestic revenue growth could be temporarily stalled by new streaming competition; however, foreign growth should be relatively unaffected by domestic competition and we expect it to grow near 40% +annual growth rate for many years.
Netflix remains a “flower” but may need some extra watering (new content) to keep it on its growth path. Worries over new competition appear to be already baked into the share price. However, the stock remains under pressure, as reflected by its negative relative strength to the market since July. Still, in the end, Netflix is a well-run, fast-growing business that should be a core streaming service for most households.
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