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Cloud Stocks: Time For Skepticism with Netflix

Posted on Tuesday, Oct 22nd 2019

Netflix (Nasdaq: NFLX) has had a tumultuous year so far. The stock has lost nearly 20% of its value since the beginning of the year. Increasing competition from rival and upcoming players in the streaming space are raise concerns over Netflix’s ability to keep growing, especially in the domestic market.

Netflix’s Financials

Netflix’s Q3 revenues grew 31% over the year to $5.245 billion, marginally shy of the Street’s forecast of $4.93 billion. EPS was $1.47, ahead of the market’s forecast of $1.04.

However, the market was disappointed with its subscriber addition. During the quarter, it added 6.8 million subscribers, compared with 7 million paid subscribers expected by the analysts. This was the second consecutive quarter that Netflix missed the subscriber addition expectations. At the end of the quarter, the company had 158.33 million paid subscribers globally, growing 21.4% over the year, but falling short of the expected 158.56 million global paid subscribers.

International Streaming revenues grew 40% over the year to $2.76 billion, falling short of the guidance of $2.78 billion. US Streaming revenues grew 25% to $2.41 billion, marginally ahead of the management’s guidance of $2.40 billion. The DVD business revenues fell 19% to $71.9 million.

For the current quarter, Netflix forecasts earnings of $0.51 per share on revenues of $5.44 billion, falling short of the market’s forecast of earnings of $0.84 per share on revenues of $5.52 billion.

Netflix’s Subscriber Concerns

By region, International Streaming subscribers grew 33% to 97.71 million. It added 6.26 million paid members, better than management’s expectation of 6.2 million. The growth in the international markets was driven by the introduction of a low-priced mobile plan in India, cutting prices in South Korea and growing partnerships with other international vendors. Netflix is now available on Sky Italia in Italy, Canal+ in France, KDDI in Japan and Izzi in Mexico. It also expanded its service offering in other languages including Vietnamese, Hungarian and Czech.

Additionally, international content remains a big focus area. Netflix has added more than 100 seasons of local-language shows to its library and plans to add 130 more by the end of next year.

However, it was a different story in the domestic market. In the US streaming segment, paid subscriber base grew 6% over the year to 60.62 million, translating to an addition of 0.5 million paid subscribers, falling short of the expectations of 0.8 million. The miss in the numbers was attributed to the price hike that Netflix had announced in January this year. The price hike did improve the average revenue per user for the US markets, which grew 16.5% over the year.

The US market will continue to be a concern for Netflix. The market is already saturated and continuing to grow will be difficult. But competition from others like Disney and Apple will make it even more so. Earlier this month, Disney was running a special offer allowing customers to sign up for its streaming services for as low as $4.99 a month compared with the regular price of $6.99 a month. Disney’s streaming service launches in November this year and will have content from Disney, Pixar, Marvel, Star Wars, National Geographic, and its Fox partners. Disney is also expected to offer a bundled service to include Hulu and ESPN+.

Apple TV+ is also launching in November with a subscription of $4.99 a month. Recently, cinema chain AMC also announced plans to enter the streaming market. Its streaming service will allow members of its loyalty program to rent or buy films and watch them at home. AMC already has more than 20 million US households that have signed up to its AMC Stubs program. These users will be able to access almost 2,000 films from every major studio as part of this service. Later this year, AMC will also expand this service to include films from IFC Films and RLJE Films.

While Netflix has been dismissive of the growing competition earlier, it appears to be changing its views now. It is now recognizing that growing competition will result in some headwind in the near-term. But it believes that the addition of streaming options will accelerate the shift from linear TV to on-demand consumption of entertainment. While players like Disney have strong content, they don’t have it in as many languages or genres. Netflix will benefit from the diverse content library that it already has.

Over the next two years, Netflix will see content from Disney, Fox, Warner Bros., or NBCUniversal vanish from its site. It will have to continue to rely more on its original content to attract viewership. Netflix spent an estimated $15 billion on creating and licensing content this year and expects to grow that by 20% in 2020.

For now, Netflix remains the largest streaming TV company in the world. In terms of size, Amazon Prime remains its largest competitor with over 100 million users. But Amazon does not declare Prime Video viewership rates. Despite Netflix’s assertions, I am not very bullish on Netflix going forward.

Its stock is trading at $278.05 with a market capitalization of $121.8 billion. It had peaked to a 52-week high of $385.99 in April this year and hit a 52-week low of $231.23 in December last year.

This segment is a part in the series : Cloud Stocks

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