Something New About Netflix

Oct. 31, 2016 2:04 PM ETNetflix, Inc. (NFLX)49 Comments
Henri Blomster profile picture
Henri Blomster
520 Followers

Summary

  • Most analyses concentrate around the “single S-curve."
  • Although Netflix is a focused company it has proven the ability to jump the S-curve in the past.
  • Netflix is all about making a unique offering to its customers.

The S-curve describes how products evolve in time. Product development takes time and in the infancy stage only early adaptors are buying the new product. In the expansion stage the majority of consumers start buying the product and the company experiences rapid growth. In the maturity phase growth slows down, reach sales peak and start declining.

Currently discussed

The majority of discussion about Netflix valuation has been focusing of different aspects of this S-curve. There have been fears about growth slowing down as this slower growth could be a first sign of coming close to the maturity phase. There are discussions on how much longer Netflix can grow. In a way, these discussions are educated estimates on where Netflix (NASDAQ: NASDAQ:NFLX) stands along this S-curve.

Where Netflix stands on the current S-curve

While evaluating where Netflix stands on the current curve, an investor might be tempted to simply plot some recent numbers on a chart and then to conclude that growth is slowing down. Like this:

However, slower growth is a false conclusion. Why? Because the data presented above is too shallow. It is especially important to avoid small data because the human mind is set to make false conclusions based on "recognition" of false patterns. This is known as the clustering illusion.

Using quarter-to-quarter data includes bringing in seasonality and one-time events. An example of a one-time event is the grandfathering issue of Q2 2016. These kind of "impurities" are leveled out by charting year-over-year (YOY) changes. This is because YOY-data-points contain more data than quarter-to-quarter-data-points. My point is this:

The second point is that we should look at long-enough time intervals to see the big picture. When you at a longer time period of YOY data, you see that growth is clearly the trend also in U.S.

However, in

This article was written by

Henri Blomster profile picture
520 Followers
Henri Blomster is a member of the Board of Directors of a company called Salkkumedia. In addition, Henri has broad and long experience as a private investor. Furthermore, Henri has a Ph.D. in Cell Biology and B.Sc. in Finance. As a researcher, he got experienced in data analysis of several concurrent components, i.e. Systems Biology.

Disclosure: I am/we are long NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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