Netflix Inc. (Ticker: NFLX) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Netflix, Inc. is an American-based subscription streaming entertainment service and production company. Netflix offers TV series, documentaries, and feature films across various genres and languages. Netflix provides a library of films and television series and also produces its own content. Netflix allows its users to access all of the content on its platform through internet streaming and also provides DVDs by mail. Netflix is available all over the globe in 190 countries total and NFLX has offices in the United States, Canada, France, Brazil, Netherlands, India, Japan, South Korea, and the United Kingdom. As of July 2021, Netflix has 209 million subscribers, making it one of the largest technology companies in the world.
Quantitative Analysis
At the time of this writing (8/15/2021), NFLX is trading at $515.92 with a market cap of $228.34B and a 52-week range of $458.60 - $593.29. In Q2 of 2021, Netflix’s revenue increased by 19% year over year to $7.3 billion, but operating income rose 36% in the same time period to $1.8 billion. The COVID-19 pandemic pushed Netflix’s growth but has also led to lumpiness in earnings. Netflix’s earnings per share for Q2 (2021) was $2.97, but they project EPS to drop to $2.55. Growth is also expected to slow, which makes Netflix’s own projections somewhat discouraging. Return of equity (ROE: Net Income / Total Equity *100) of Netflix Inc. is 36.49%, the price to earnings ratio (P/E) is 53.46, and net margin (net income / revenue) is 15.92%. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view NFLX’s 2021 Q2 earnings here and their 2020 Annual Report here.
Qualitative Analysis
Netflix was the first big streaming service and currently has the majority of the market share, but competition is increasing. Netflix has its own content but it is difficult (and costly) to produce original content which can help keep customers on their platform. Over the last several years, competition in the streaming industry has really ramped up, and COVID only accelerated the industry. Almost every major network now has their own streaming service. Netflix’s operating costs are very high, particularly costs related to the creation of their own content. Although costly, their original content has been very successful, winning many awards. Awards aside, their content brings in customers - it’s not uncommon to hear someone say “is it on Netflix?” With increased competition, it will be difficult to continue to dominate market share. Continuing to produce original content may be their key to retaining existing customers and may potentially help them gain new subscribers.
Bullish Thesis
Here are three points to support the bullish thesis:
Subscription Based Approach: Netflix is one of the original subscription based models. Netflix currently has the biggest percentage of the market share of the streaming services. With the subscriptions Netflix now has subscribers paying monthly for Netflix content. Currently Netflix is gaining more subscribers than losing and if that continues it will always be bringing in consistent revenue. The subscription model will always bring in consistent revenue and it will continue as long as Netflix can maintain its subscribers.
Quality of Original Content: Netflix received 129 nominations for Emmy Awards and was a close second to Warner Media’s HBO and HBO Max which had 130 nominations. Netflix won the most awards of any studio at the 93rd Academy Awards and won 7 Oscars but did not win the best picture and acting categories. Netflix also went into the Oscars with 36 nominations, far more than any other studio. These are just a few of the major highlights of the quality of Netflix’s original content. Netflix’s has built a reputation of producing quality content and this quality content will continue to attract new subscribers and keep existing ones.
Valuable Intellectual Property: Netflix has built up its intellectual property throughout the years which will always stay on the platform thus the renewable content will be attractive for new and current users. Because of Netflix’s IP, it now has the ability to take more chances and find new ways to create revenue. Netflix has been rumored to attempt to interact with its customers more with Netflix Shop which will sell high-quality and limited-edition merchandise based on its IPs. Netflix also announced it will be launching Netflix Arcade which will offer original video games similarly to how Netflix produced documentaries and stand-up specials. This will allow Netflix to produce more content to keep users on its platform and this is possible because of the intellectual property it owns.
Bearish Thesis
Here are three points to support the bearish thesis:
Streaming wars (increased competition): The last several years have marked a massive growth in the entertainment streaming industry. Major players in entertainment streaming include: Netflix, Hulu, Disney Plus, YouTube, Twitch, HBO Now, ESPN+, Amazon Prime Video, and Peacock. As competition in the subscription-based streaming industry heats up, Netflix will need to find a way to set themselves apart. For some time, Netflix did so by producing their own original content (e.g., Stranger Things). However, original content comes with increased operations costs and, unfortunately for Netflix, is no longer a unique feature of their platform. Nearly all major streaming platforms now offer original content. Netflix will need to find creative ways to set themselves apart from their competition if they’re to remain a leader in the growing streaming industry.
Controversial content: Netflix has received pushback from customers and negative publicity for a number of shows/films featured on their platform. For example, the show “13 Reasons Why” follows the story of a teenage girl who commits suicide. Some have criticized the series, suggesting that it may ultimately do more harm than good (including at least one NIH-supported study). Another controversy arose when Netflix added “Cuties” to their library. Critics of the movie have accused it of “sexualising” young girls and “feeding paedophilia.” With such an extensive library, it will be impossible for Netflix to appease all of their subscribers - nor should they aim to. However, controversial films/shows can cause negative publicity and ultimately lead to fluctuations in stock prices.
Slowing user growth: Despite a huge spike in subscription growth in 2020 (lockdowns kept people at home and drove up the demand on streaming entertainment), user growth has slowed to levels more on par with 2017. Slowing growth may be caused by increased competition in the streaming market, people returning to work and no longer in need of Netflix’s massive library for entertainment, and market saturation (Netflix and/or other services have already acquired the majority of people interested in entertainment streaming). Although user growth has slowed down, it remains well within Netflix’s own projections. This shows that company leadership is able to create realistic growth models and knows that growth going forward will be a struggle. Netflix will need to find creative ways to monetize their service with existing customers, as increased revenue from a growing subscriber base is not likely to continue.
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Have a great week everyone,
Brandon & Daniel
Disclosure:
The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.