Is Netflix a Buy Right Now?

BY Chris Andreou

|November 11, 2020

Netflix has taken a commanding lead in the streaming market resulting in investors bidding up the company’s shares.

It’s argued to be the most powerful force in TV history, and a sure bargain for viewers compared to traditional cable television, which will set the average household back around $150.

Netflix’s market cap is higher than any TV network, including cable giants Comcast and AT&T. On November 5th, Walt Disney (DIS), was worth $226 billion as trade opened, while Netflix’s value was marked at $219.5 billion.

Since the beginning of 2020, Netflix stock has been up 53%, while Disney is down 14%.

The streaming service just increased its fee for its monthly subscription package by $1 to $14 a month for its standard subscription for the first time since January 2019 – sending the stock price surging almost 5% on the day the news was announced.

It ended its third quarter with 195.15 million subscribers, up 2.2 million from the second quarter.

Over the last few years, the company has been investing heavily in strong local-language original content production worldwide.

One thing we have seen during the pandemic is a boost in the company’s business and demand. The service enjoyed a boom in subscriptions at the beginning of the year as viewers around the world were told to stay at home.

Even recent news of a likely vaccine in the near-term is unlikely to make a dent in the optimism surrounding the streaming titan. Netflix boasts a retention rate of 60% of all users who still pay for the service after two years. That’s a rate that dwarfs that of its competitors, and means that Netflix knows how to keep users “hooked” after onboarding.

During the September quarter, Netflix earned $1.74 a share on sales of $6.44 billion. Wall Street analysts predicted earnings of $2.13 a share on sales of $6.38 billion.

Year-on-year, however, earnings have risen 18% while sales have climbed 23%.

Over the next quarter (December), earnings are forecasted at $1.35 a share on sales of $6.57 billion, while analysts have predicted earnings of 94 cents a share on sales of $6.58 billion.

During the same period the previous year, earnings were $1.30 a share on sales of $5.47 billion. As a result of missed subscriber targets, the stock dropped following the company’s third-quarter earnings report. Although 2.2. million new subscribers signed up during this time, the company had forecasted a figure of around 2.5 million.

The company expects to end 2020 with more than 200 million streaming subscribers worldwide, 73 million of those from the US and Canada.

Netflix said it expects to be consistently free cash flow positive starting in 2022.

Following the latest earnings report, Chief Operating Officer Greg Peters said the company saw an opportunity to increase prices in countries “where we’ve delivered that extra value.”

Another spokesperson for the company explained prices were being increased, “so that we can continue to offer more variety of TV shows and films – in addition to our great Fall line up.”

Move over Disney

The company boasts several popular and original content names. However, it faces stark competition from other traditional media companies.

These days, Netflix’s biggest threats are Alphabet’s (GOOGL) YouTube, Amazon Prime (AMZN) and of course, Apple (APPL). All of these competitors have a market cap north of USD 1 trillion, meaning their parent companies put Netflix in their rear-view mirror by comparison.

Nevertheless, Netflix is holding its own and growing market share against the odds, with very few analysts now doubting its sustainability.

What makes Netflix better than Disney?

Two technology forces: one of which is known as Open Connect, a network topology Netflix announced in 2012, which caches Netflix content in geographical locations that are proximate to subscribers. In addition to ensuring fastest load and streaming speeds for viewers, this also reduces last-mile cost for Netflix, much of which is passed on to local ISPs.

The second is how Netflix chooses what content to produce. Disney, for example, traditionally negotiates with creators over things like artistic vision. Netflix, on the other hand, takes a much more data-driven approach.

It’s not just the shows that a subscriber might enjoy. It’s the type of shows. For example, Netflix execs can discover not just how much subscribers enjoy crime documentaries, but the types of crime documentaries – such as murder or theft.

It’s then that producers are signed under contract with guidance on what to make. Producers are given huge audiences for content that Disney wouldn’t even think to stream. A hugely popular TV show could potentially draw 10 million viewers, for example. Another documentary involving murder, mayhem and madness, revolving around “ Joe Exotic”, the owner of a zoo in Oklahoma which specialises in big cats, was watched by 65 million people worldwide.

So, to buy NFLX?

Netflix is truly dominating the subscription video-on-demand market. No other SVOD service comes close to achieving its level of global scale. Even Amazon’s “over 150 million” global Prime members can’t really be considered a challenger, as surveys repeatedly show that the vast majority of subscribers primarily use the service for expedited free shipping, not for video content.

Netflix has a huge opportunity for growth still ahead of it, given its sector market size of 2 billion households globally. As it continues its rapid expansion, its content costs are unlikely to grow as fast as its revenues.

This is a positive feedback mechanism that should see Netflix’s business continue to skyrocket over the next several years. For that reason, many investors are now considering buying the vaccine-news dip.

If you’re thinking of going long or short on NFLX, TIOmarkets offers a secure, fast and cost-effective trading environment to do so.

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Chris Andreou

Experienced independent trader

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