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Time seems to be flying in today's digital age. New age has its own challenges that are pushing people to become more efficient. Time really seems to be money. Old idiom 'A penny saved is a penny earned' has now transformed into 'A minute saved is a penny earned'. People are now watching TV for lesser hours and spending more time using smartphones, tablets and laptops and a great number of incredible apps that are available to them at their ease, anytime they want.

With the passage of time new technologies are coming in the market to satisfy the changing needs of this age and are replacing the existing technologies used. Companies that are pioneering such new technologies are leading the transformation of the industry and becoming the rising stars and the companies that are slow to innovate are forecasted to decline. All this can be seen in television industry.

War is inevitable

It's an alarming satiation for businesses like HBO and MTV that are dealing in cable, direct satellite and Telco since they have begun to lose their customers, who have now attracted towards their online competitors like Netflix (NFLX) and the over the-web video players, Xbox, Amazon and YouTube. With the growing use of smartphones, tablets and laptops, conventional competitors dealing in cable, direct satellite etc. are forecasting the fierce war that they will have to fight with new technology invaders like Netflix, in coming years.

Competitive edge: Value created by Netflix

Customers will pay their hard earned bucks only to those service providers that would really add value to their life and it seems that Netflix will be their choice. Netflix provides entertainment shows on portable platforms of smartphones, tablets and laptops and user can watch shows anywhere anytime and Netflix allows users to pause, forward and rewind. Netflix users don't miss their favorite shows. A very unique feature of Netflix is that there are no adverts.

All these features help Netflix users to be time efficient and still be entertained as they wish to. So Netflix makes you feel like a king and entertainment is at your disposal. Constant innovation is a big strength of Netflix that sets it apart from its rivals. Due to these features Netflix sales growth is on a rise and is expected to continue in the future. Recent example of constant innovation is that Netflix has added new user friendly features that would help its users organize the shows and movies they want to see.

They have the cash now and they are investing it to make more

There is another way Netflix has successfully differentiated itself from its streaming service competitors. It has started its own original production in 2011 that proved very popular and profitable. Three of its original series won prestigious Emmy award. These three series had received a total of fourteen nominations. These series made history being the first series that won Emmy without getting aired on broadcast network or cable network. Netflix is working on many other series. It is also working with Marvel Television, DreamWorks Animation and others to produce super hero series, animations and much more. This has increased profit potential enormously.

There are surveys showing how Netflix is gaining acceptance among masses. "Netflix: Binge TV watching is the new normal" says msn money.

Netflix membership on the rise

Netflix has increased its membership level to over 40 million this year from previous year's level of 30 million subscribers. Netflix has shown a strong growth in paid membership especially in the international markets. Healthy improvement can also be seen in revenue, contribution profit and contribution margins in both domestic US market and in international market. Contribution margins in international markets are still negative but improving rapidly. Following table summarizes the story.

(click to enlarge)

Source: Netflix website

Company is aspiring to work towards an astounding 114 million subscriber level set by HBO in the coming years. Reed Hastings, CEO and David Wells, CFO in their message in the Q3 2013 report say:

"We have done well but we have a long way to go to match HBO's 114 million global member count or their well-deserved Emmy award leadership. Title by title, device by device, member by member, award by award, country by country, we are making progress."

Diverse geographical presence

Currently Netflix is operating in 41 countries in the regions of North and South America, the Caribbean, United Kingdom, Ireland, Sweden, Denmark, Norway, Finland, the Netherlands. It is planning to expand further into new markets. If they are able to handle business in these diverse locations, it would help diversify away their business risk.

Challenges and threats

  1. Large players in television industry like Time Warner don't accept Netflix as a threat but they must be keeping an eye on mile stones Netflix is achieving each year. They must be working over some plan to build some kind of defense. One possible defense that these conventional big guys can build is providing more on demand content making their service more appealing to users. If it happens then fewer customers would pay for supplemental service of Netflix and Netflix growth may hamper.
  2. At present existing competitors like Hulu and Amazon.com (AMZN) are lagging behind Netflix since they are not as lean and aware as Netflix. Hulu still carry the extra lbs of advertisements. Competitors still seem to lake the in depth insight of customer liking that Netflix has gathered in last 10 years. If, however, these competitors make them more efficient and aware then they can brand themselves strong enough to pose real threat to Netflix.
  3. Pay-per-view movies and TV seasons are currently priced around $2 to $10. If they are charged lower and consistently, let's say $1, then customers may be attracted. In such a situation customers may be less inclined to subscribe to Netflix. This can reduce the momentum of Netflix's growth.

But looking at the tactics of current players, threats mentioned above are hard to be realized in the near future. Even if some of these threats are realized, it won't be the kind of threats that Netflix won't be able to fend away, considering its trait of being proactive and innovative.

Conclusion

On the basis of above analysis of consumer and technology trends, it is clear that Netflix, being a focused service provider, will register a lot more growth in the coming years. Its business model that creates value for modern age users, unparalleled innovation and pro-activity has led the television industry to evolve in a complete new direction.

Big players of television industry will soon be going to have nightmares of Netflix trying to capture their empire. Existing online streamers are not as idea efficient and proactive as Netflix. This is likely to keep Netflix two steps ahead of other online streamers in the future.

Netflix has on the whole impressed analysts in last 10 years and I expect it will keep doing so in the future. I believe Netflix is a good investment, so add it to your portfolio and hope for the best.

Source: Netflix: The Value Creator