Last night, Netflix (NFLX) reported in line numbers which actually was good news for its shareholders. There seems to be a large holdout of bears in the name, and we think they should be careful. Why? Because the economy is slowing and consumers are very cost conscious and their habits are changing, fast. Just ask Charlie Ergen from Dish Network (DISH). He is making a bold move to beef up his offering to consumers to get mobile, as we have written in the past. To see what Charlie thinks about Netflix, watch his AllthingsD interview from February 2013. The video delivery business for the large cable and satellite operators is ripe for disruption, and the writing is on the wall. Investors are getting in on the action, especially as they see NFLX gaining traction with its ala carte on-demand video offering with users ramping up by 3 million in the Q1, bringing its total to 36 million subscribers. That's 22 million more subscribers that DISH and all without needing the cap-ex for launching a satellite or laying fiber optics, and having to maintain them as well.
To be sure, there are differing views on NFLX's prospects.
Thomas Pachter of Wedbush is quoted here:
"In our view, much of the recent subscriber growth is an acceleration of subscriptions that would have been sold later in the year; accordingly, we expect Netflix to face a headwind in Q3 and Q4." He has an "underperform" rating on the stock and a 12-month price target of $65.
And BTIG's Richard Greenfield from a CNBC article says:
"People are using their Netflix more and more every day and the more you use something the less likelihood you're going to cancel," he said. "As you start to see churn tick down, the ability to outperform on subscribers… is why the stock is going to $250." .... "He also said that paying up for third-party content becomes less important as it develops its own quality original programming."
Meanwhile, broadcasters are still digesting the implications of the court ruling in favor of Aero, a disruptive startup backed by Barry Diller which is already threatening the must carry rules for its cable TV premium offerings. With advertising dollars being lost to internet and mobile mediums from traditional broadcasters and the new threat from ala carte offerings from Netflix and Amazon (AMZN), we think the broadcasters and cable companies are in for a rude surprise: Major competition from non-infrastructure based competitors like NFLX at a time when the consumer is facing renewed pressure stemming from a slowing economy as a result of sequestration and a global downturn.
Fellow SA writer today wrote :
"Absolutely everything is going to be streaming in the future, which is going to require massive amounts of bandwidth. ...They'll assuredly get major pushback from companies like Time Warner (TWC) and Comcast (CMCSA), but Google (GOOG) is the only kind of company that has the resources and cash to compete with the major cable companies, ...."
We agree, but today NFLX is the leader in the space and this brings with it a big first mover advantage. One thing NFLX can use to extend its leadership is a powerful intellectual property portfolio, especially in the streaming venue. We have written in the past and continue to believe that Single Touch (SITO.OB) possess powerful streaming media and advertising patents which could give NFLX a large strategic advantage as well.
Meanwhile Economic Reports Show A Dive
There is mounting evidence emerging today that China's PMI was down more than expected, adding further pressure to the decelerating growth scenario. Mining companies continue to be under pressure as minerals such as copper, coal and oil dropped to levels not seen months.
A CNBC report about Swedish mining companies today says:
"Shares in both Sandvik and Metso rose more than 2 percent, however, as investors had been bracing for worse after the world's biggest mining and construction equipment maker, Caterpillar Inc, cut its 2013 sales forecast due to weak demand from mining customers. ...Miners have scaled back investment plans against a backdrop of slumping prices of coal, copper and other commodities. ...Sandvik Mining, which continued to be affected by weaker demand and uncertainty from the mining industry," the Swedish company said."
And Europe gets worse according to Reuters:
"The dollar hit a two-week high against the euro, commodities fell and German bond prices jumped on Tuesday when data revealed slower business activity in Germany and China, the world's two biggest exporters, fuelling global growth fears."
Why all the economic news? Because the consumer is still under pressure. And while he is, he will look for cheaper ways of doing the same things he already does, just in a more efficient manner ... just like most companies today squeezing out better earnings from stagnant or lower revenues. This will lead to better results for innovators like NFLX and even GOOG as they build new platforms for a changing consumer.