Netflix: 'The New Content King' Is Seemingly Unstoppable

Summary

• Netflix is seemingly unstoppable; in addition to being the best performing stock of the last decade, Netflix has already gained 65% in 2018 alone.
• With around 120 million subscribers and nearly 50% of total streaming time in the U.S., it's difficult to debate Netflix's status as the king of streaming.
• But with an $8 billion content budget this year Netflix threatens to become "the new content king" as well.
• The Disney "threat" appears to be significantly overrated.
• What to expect from the new content king going forward.

Source: Collider.com

Netflix: Seemingly Unstoppable

Netflix (NASDAQ:NFLX) has been on fire lately and is now up by roughly 65% in 2018 alone. But it's not just lately, Netflix is by far the best-performing U.S. stock of the last decade, yielding an incredible return of around 10,000%. I've been a Netflix subscriber since 2010 and an investor in its stock since 2011. My latest entry into NFLX came prior to Netflix's earnings report when I put out a "Trade Alert" Marketplace article for the company on January 22nd.

I essentially traded in my Microsoft (MSFT) shares to provide room for NFLX in the "technology" portion of my portfolio. Naturally, I am very happy with the tradeoff, as Netflix has gained about 45% over the seven-week period, while Microsoft has remained largely flat. So, what's next for Netflix? Will the stock keep rocking higher? Is a correction in order? Is it time to trade Netflix back in for Microsoft? And what if anything can derail the Netflix train?

Content is King

With about 120 million worldwide subscribers, and nearly 50% of U.S.'s time spent streaming, there is little denying that Netflix is the undisputed king of streaming. Moreover, judging by recent developments, it appears that Netflix is becoming the "new content king" as well. Netflix is investing heavily into expanding its original content library, and it's paying off big. The company has already invested billions, with $6.3 billion spent on content in 2017, and the company plans to invest around $8 billion this year. In comparison, in 2017, Apple invested just $1 billion, Hulu spent about $2.5 billion, and Amazon (AMZN) put up $4.5 billion for content. With the massive time spent streaming advantage, numerous favorable reviews, and 20 Emmy wins, it appears that Netflix may have gotten the most bang for the buck when it came to internet-based content.

Source: BusinessInsider.com

However, Netflix is not only going after the Internet, with an $8 billion budget in 2018, the company is targeting to better TV's biggest networks. For example, Time Warner's, HBO included total non-sport content budget for 2017 was $8 billion, Fox's total non-sport content budget was $8 billion, and Disney's (DIS) non-sport content budget was $7.8 billion last year.

So, what does Netflix get for its money? Well, the company put out over 100 new hit series and original movies last year, equating to over 1,000 hours of high quality original content. This trend has expanded into 2018 as the company continuously churns out high quality series. New original content such as "Altered Carbon", "Seven Seconds", "Everything Sucks", and many other hit series appear to be a step up from the often-stale competition provided by the TV networks. I think it's fair to argue that while Game of Thrones, Fargo, and others are great shows, HBO, and other major networks are struggling to keep up with Netflix when it comes to putting out a significant number of highly diversified quality shows. This is especially true if we look internationally.

Source: TechCrunch.com

Netflix's International Advantage

Netflix's international subscriptions grew by 6.36 million subscribers last quarter, significantly outpacing estimates of 5.1 million, and growing by a staggering 42% on a yoy basis. International growth is especially key for Netflix as the international market is far less saturated than the U.S. The majority, or about 54% of all Netflix users are outside the U.S. now. It is also important to mention that the 120 million worldwide subscribers Netflix has is a relatively small figure considering the number of people who have access to the internet in the world. In fact, out of the estimated 3.6 billion worldwide users, Netflix's subscribers represent a miniscule 3.3%, which suggests the company has an enormous amount of potential market share to conquer.

Source: Statista.com

So, how does Netflix expand so effectively outside the U.S.? You would think that Netflix being a U.S. company with predominantly U.S. centered content, it may not experience rampant popularity outside the U.S. Well, aside from offering exclusive, and incredibly innovative U.S.-oriented content, the company also offers an enormous amount of international content. A significant part of Netflix's content budget appears to be wisely aimed at a diversified international audience.

Source: LosAngelesTimes.com

Netflix partners up with enterprises all around the world to produce exclusive content shot in native areas, using popular local actors. There is an increasing number of shows from all around the world populating Netflix's expanding library. France, Germany, Norway, South Korea, Japan, Russia, England, Australia, Mexico, and numerous other regions in the world have their own shows on Netflix, which makes the service much more desirable to subscribe to by local populations.

Disney Threat: Highly Overrated

The "Disney threat" to Netflix appears grossly overrated. Yes, Disney pulled out of its partnership with Netflix. But will I lose sleep over it as a Netflix subscriber and shareholder? No. Perhaps the most significant hit to Netflix will be the eventual loss of its Marvel series, most notably Dare Devil, Jessica Jones, and Luke Cage. These are hit shows that have gained significant popularity, and I will be saddened to see them go. However, it is not clear who this breakup will hurt more Netflix, or Disney. My guess, Disney.

With an $8 billion content budget, Netflix will fill the holes left by the Marvel shows and other Disney content. However, creating such shows and successfully distributing them on a streaming service to 10s of millions of viewers may turn out to be more difficult than people think. Netflix has an established streaming platform with about 120 million subscribers, Disney does not. Moreover, it is not so easy to attract mass subscribers to a streaming plan; just ask HBO. HBO Now, which is HBO's attempt to answer Netflix's streaming service, has roughly 5 million subscribers. Although this is not an insignificant number, it is a long way away from Netflix's 120 million. HBO has been working on its streaming business for about three years, but it doesn't appear to be impacting Netflix's growth all that much, and neither should Disney's streaming service when it launches in 2019/2020.

After all, consumers could easily subscribe to multiple services. Also, it is widely observed that Netflix users are by far the stickiest and most loyal bunch in the industry. Netflix's service continuously enjoys extremely favorable reviews and feedback scores from its users.

Source: BisinessInsider.com

Source: BGR.com

Technical View

With an RSI at 75 and a CCI close to 200, the stock appears to be slightly overbought on a short-term basis. However, the uptrend looks extremely strong, and the stock is supported by significant upward momentum. A short-term pullback to around the $300 level appears possible. However, the overall trend remains strong and suggests the stock should continue its ascending trajectory going forward.

Source: SharpCharts.com

What Could Derail Netflix?

A possible element that could derail Netflix from its path of dominance in the streaming game is a deceleration in subscriber growth. However, this scenario is only likely to occur if a global slowdown or a major recession materializes. Netflix's worldwide subscriptions are still very low at around 3.3% of the addressable market, and significant growth could continue for many years. However, if a global slowdown does occur, Netflix's stock will likely take a big hit as overall risk appetite will be reduced, and Netflix does trade at a very high multiple. Moreover, consumers could cut back on expenses, and streaming could be one of them. Therefore, Netflix will not make for a good stock to hold in a recessionary environment.

Conclusion

In the short to intermediate term, so long as Netflix continues to beat estimates on subscriber growth (and I think that it will), the stock is likely to proceed on its upward trajectory. It is possible that a minor correction to around the $300 level may occur, especially if the broader markets remain volatile. However, a significant decline is extremely unlikely unless a recession or a bear market in stocks materializes. Despite Netflix being "overvalued" by traditional metrics, the stock will likely continue higher as demand should remain robust for its shares.

Demand for shares should remain robust due to Netflix's extremely strong user growth, and user growth should continue to rise because of Netflix's increased popularity, which is being propelled by its increasingly expanding library filled with quality original content. Moreover, continuous user growth should enable robust growth in Netflix's revenues of about 20-30% annually for the next several years (possibly 5-10). Therefore, I remain long Netflix shares despite the sharp run-up in price and plan to continue to hold NFLX throughout the year, maybe longer.

Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.

Analyst’s 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.

Comments

[User 48159355]

Bitcoin below $9,000 on Google's ad ban.

[D.Rapp]

Excellent article with very demonstrative exhibits. That pie chart showing Netflix with a 46 percent share speaks volumes. Keep up the good work.

[Victor Dergunov]

Thanks D.

[User 48159355]

Bitcoin $1,000,000......Bitcoin $8,000

[Victor Dergunov]

Maybe $3,000 soon...

[kimboslice]

ROKU is the one I wish I had bought recently. Oh well.

Netflix is going to be another TV studio. They will make some money at it, how much remains to be seen.

My friends in Mexico like Netflix, there is a lot of content in Spanish. They generally share the account with relatives so actual Netflix users probably outnumber subscribers by far down there.

My favorite content now is coming over a digital antenna from Walmart, plus Turner Classic Movies on my DirecTV. I haven't watched Netflix in a dog's age.

[alpine]

Is there any reason why you prefer ROKU over NFLX?

[Gellewza]

NFLX got me back on my feet this year, after the 2008 financial crises.

[alpine]

Great article, and put in an interesting and compelling way that I took the time to read it till the end, and reflect on it. It seems NFLX does have a great 'moustrap' in terms of combining an eclectic mix of science, technology, art (ie. clever content) and of course, people. But the overriding thought for most people who are not already in the stock is whether it is too high, and got there too fast?

I wonder if there is a way to actually "value" the stock, using say, a DCF model of its prime hit shows, using lifetime annuity stream cash flow projections from them, and some assignment of terminal value for the stock, by comparing it to the terminal value one would assign to the likes of DIS, AMCX?

Althought the topic was not raised in your article, does 'net neutrality' fading away pose risks to NFLX' business model?

[Victor Dergunov]

Thanks Alpine.

[BrutalHonesty]

The problem I have with this article is could have been written in exactly the same way if the price of NFLX shares were $1000. There is no attempt at a valuation or even just some basic parameters. I can summarise the article, "The company is doing well, so the stock should go up." Even companies that are doing very well and may continue to do so can have overpriced shares.

[igor555]

No time for that gotta pump out articles

[Victor Dergunov]

Yes and those shares will continue to go up until they don't any more. What is the point of providing a valuation analysis for NFLX if it doesn't trade on "valuation based fundamentals"?

[GDPPP]

It trades on subscription growth numbers. The buck will stop at some point when the subs either flatten out or show deceleration at some point. I think that could likely happen a few years down the line if consumers find something better and cheaper than NFLX.

[User 49081631]

Right now YOUTUBE TV is doing it right. If you haven't looked at what it does, go sign up for the trial and see for yourself. You can record A-grade movies, shows, and live tv into an infinite storage space with no extra cost. If there was one streaming service I see competing with Netflix, it's YouTube TV.

[yellowpage]

A graded TV? You meant commercials?

[webslinger48]

Netflix started as a disruptor but what it is becoming is basically a glorified cable company.

With cable, I overpay for a mass of channels when I only want five.

With Netflix, I overpay for a mass of shows when I only want two. Investors are subsidizing the content creation costs but for how long? Eventually their subscription fees will have to rise to cover the cost of its generation.

Disney has 80 years worth of content, many of it fondly remembered and rewatched like Snow White. Netflix has a few years worth and is anybody going to fondly remember House of Cards or Orange is the New Black and rewatch it in even five years?

The true disruptor will be the one that enables us to pay for just the shows we want from all of the content providers, not just one.

[User 49081631]

You basically just answered your own question. You 'grew up' on Disney, therefore the nostalgia and stickiness is with your generation. Millennials are growing up on Netflix, therefore the stickiness and nostalgia of Netflix shows will be with their generation.

[User 43325506]

Netflix has a new series for me every other week. You seriously cant expect people to like watching Disney classics over and over again?

[webslinger48]

I enjoyed your use of the word "classic." In order for something to receive that designation, there are three requirements -- it must be old, it must be good, and people must still want to watch years later. Is there any Netflix program that will check all three of those boxes?

The other advantage Disney has is the licensing.

I haven't seen any House of Cards action figures, have you?

[Flight of an arrow]

Horribly overpriced, $11 billion in revenue, $7 billion+ in content production alone, not counting other expenses, $120 billion market cap and STILL negative free cash flow and a ton of debt after 8+ years worth of QE inflation. Companies propped up on cheap debt to produce aggressive growth might just find that strategy not too viable anymore if interest rates rise gradually.

I really wouldn't discount Disney or a bunch of other old media players as well, streaming technology has been around for awhile (hi Youtube) and replicating Netflix's model is not that difficult.

Also, not quite analogous but it's like shareholders being happy that Apple invests a ton of money (70% of their revenue) in making a ton of iPhone Xs then sells them at $400 instead of $1000, just so they can sell it to more people. They might have a lot of customers but they're still generating a loss! Talk about expensive bubbles in bull markets.

When valuations start to matter in bear markets, Netflix probably has a fair valuation of <$150 a share based on fundamentals like actual EARNINGS, which would put them around Time Warner's market cap.

[User 49081631]

You're acting like the buck stops with an iPhone purchase. You are forgetting that 92% of iPhone users end up re-buying an iPhone (stickiness). You are forgetting that once you own an iPhone, you are invested in the Apple ECOSYSTEM. Once in the ecosystem, you are MUCH more likely to purchase other Apple products like iWatch, iMac, etc. You are forgetting that once you own an Apple product, like the iPhone, you are now dedicating at least 33% of all App store purchases (in-app and app purchases) directly to Apple. You are forgetting that with Apple products you contribute to Apple through Apple Music. The list is vast and ever-growing. Don't sleep on Apple.

[LoloE]

No one is disputing Netflix as a product. However regarding the stock, it is clear that with a negative FCF over the next three years, valuations that exceed any reasonable multiples -even by taking the growth into consideration -, Netflix is way too expensive. Momentum players are buying but as soon as the market will end the bull market and probably this year, the move back to 200 will be painful. Enjoy the ride while it lasts.

[Belegde Boterham]

"End of the bull market and probably this year", well once, but i've read it too often the last couple of years ;)

[nerd_rage]

The Disney threat has yet to materialize. Even if it's a serious threat (a combo ESPN/Disney/Hulu package for $12/month, global), it won't kill Netflix. Will help kill off anyone below a very lofty tier though.

[jhawker8]

So far, DIS is not signaling anything so reasonable. DIS hands are really tied due to needing to maintain value with the cable/satellite platforms. So I do not see them ever offering a true streaming platform in the near future.

At this time all I have seen from them is a $4.99/mo plan that only works if you already have a cable/satellite plan in place. No real value. DIS is not cord cutter friendly. And they cannot afford to be if they want to keep the ESPN payout from the cable/satellite providers.

[fydo]

Lots of resistance, on chart, to further climb...retrench to 300 an almost certainty. Then maybe lower, if FED raised rates late this month. IMHO.

[Financial River]

The real challenge is it's not just Disney, and also I have watched most the content on Netflix and sure they have some decent show and movies but not enough to keep people interested. Most shows and movies have bad acting and are low budget to the point you can't watch them. 50 percent of the US having a Netflix account doesn't make any sense that's would mean their are 150+million subscribers. I have been surveying tons of people about Netflix in the US and they say they are all canceling it now because of the price increase mixed with the lack of good content. They watch the good shows then cancel. On top of that Subscriber growth includes free trial accounts and I know people who make fake emails just to use Netflix for free. Netflix can't catch up with it Competitors because it litterally is trying to compete against people who specialize in different subjects. For example there has never been a better kid movie maker in history than Disney. What people aren't pointing out is the deregulation Trump put into affect. Now every Tv Channel is starting their own online streaming service with much higher quality content. Not only that but each channel is more focused on a subject and puts out a faster stream of content. Netflix has a wide range of content but people don't like a wide range of shows so once they can't find something in their taste and believe me it doesn take very long, I've been a very loyal customer of Netflix for years and use to own their stock, people are sick of the sub par content. The networks all are taking their shows off of Netflix so saying Netflix is doing the Netflix originals as some kind of "legendary buisness stradegy" as some people say is entirely incorrect. They don't have a choice and now that that's happening they are NO LONG A TECH COMPANY THEY ARE JUST A MEDIA/ENTERTAINMENT COMPANY all the supports for Netflix are opinions people got from Wall street, or Californian Investors and they both have always been corrupt for years. Learn US current events and stop being so out of touch with the world. I know a 12 year old that knows better than to buy or hold Netflix stock over a 100 billion dollar market cap. Look at their trading volume chart in the last decade. Even their own CEO Reed Hastings was warning people years ago when the stock first started rapidly inflating. Now he has so much money and already publiccaly warned people years ago he doesn't care anymore. He sold Most his shares years ago. Don't buy into the the Hype it's just a tech bubble Netflix has been riding the success of Amazon and google being grouped together in the FAANG stock. Stop depending on random media articles you found on Google to get your information. By the way not that Netflix is becoming a media/entertainment company that's means wall strreets evaluation any day could drop by 1000% because if entertainment companies got paid 10x revenue Disney would be worth over a trillion dollars keep in mind they also makes video games, toys, and more. Netflix doesn't have the buying power to make amusement parks and toys as well as keep up with putting on new content. DO NOT LET THE HYPE TRICK YOU THE MEDIA HAS BEEN TRYING TO SELL THIS SAME NARRITIVE FOR YEARS.

[nerd_rage]

If NFLX doesn't have enough to keep people interested, then where did that 120 million subscriber base come from?

They may not have enough to keep YOU interested. Don't confuse that with a viable business model. Surveying a few of your friends means nothing. Most of NFLX's growth won't be among people you or I know. It will be overseas.

[yellowpage]

LOL, you don't even know what you are talking about. just a sore loser on this hot stock

[ShermanMcCoy]

Who cares what 'kind" of company NFLX is? Tech, media, whatever. All totally irrelevant. All that matters is the growth trajectory and the ability to generate a ton of cash in the medium term. The rest is all meaningless noise...

[Moon Kil Woong]

Netflix is right to move to produce their own content. And they are making good content. The rest of the model isn't so good. The content providers are gouging providers and will try to compete with their own services later. This market will be a bloody mess, however, Netflix will survive and may well be bought out at a premium eventually.

[Financial River]

They don't have a choice their being forced to because all the networks are taking their shows and movies off Netflix and creating their own streaming services at a lower price point thanks to Trumps deregulation laws he passed. Netflix is screwed.

[nerd_rage]

Netflix will be fine. Households might subscribe to 2-3 services apiece but once they have Netflix plus Amazon plus Hulu, why bother to look elsewhere? It's not even so much about price as time. There is simply too much content for anyone to consume. Two services really is more than enough. Anyone trying to jump in at this late date is going to be screwed unless they have insane brands (Disney) or an insane bankroll (Apple).

[Cyril R.]

"Therefore, Netflix will not make for a good stock to hold in a recessionary environment."

Not sure about this; NFLX stock did little in 2007/2008. Might be recession proof?

[Financial River]

The recession didn't make every stock tank. The recession was a housing market crash with some stocks that took hits as well because people had to sell shares to pay bills and more. Look at their trading volume in the last decade and you will realize their price hike is artificial. Netflix is alright as an entertainment company I guess but their being evaluated as a tech company which is no longer valid because their is nothing special about an online streaming service. Study the Tulip market in the 1500s or the .com crash in the early 2000s and you will understand that human psycology is very easily manipulated and that's what causes huge price surges like this. The downgrade yesterday and all the analyst saying "Buy on the dip" should be sign enough even they think it's to hot and gotten out of control.

[User 49220811]

The stock may be a bit too hot however I would argue that in a recession the price point of Netflix makes it a very attractive service for anyone looking to cut costs. When Netflix began their run as the dominant streaming service it wasn't because they had amazing content. It was because of the value and convenience that they were able to provide. I wouldn't say the content is great now but it has improved and will continue to improve. I know several people now who admit to not even using the service that much but the price point is so good that they don't really think of canceling "just in case" they need it. Subscriber growth would slow however a $10-15/month service is the last thing families would be looking to cut in a recession, especially families with younger children

[User 49081631]

It's hard to quantify how Netflix would do in a new recession based on historical data. 2008/2009, Netflix was still predominantly a DVD rental company. Digital media was in it's infancy. I would bet that Netflix would be one of the last services to be cancelled due to the low cost of having a subscription though. Netflix, McDonalds, alcohol/tobacco, and Dollar Tree would really do well when people start cutting costs.

[Buyandhold 2012]

The 5 year expected PEG ratio of Netflix is only 1.46.

Netflix is not as overpriced as some people think it is.

I view it as a hold.

[Cyril R.]

I also viewed it as a hold; but clearly, by the stock action, us two must know nothing ; )

[Financial River]

It's over priced because it's valued as a tech company when is really a mediocre media/entertainment company with not enough focus to keep up with more specific networks that can make more content for their target audience. Netflix will have to out spend the entire entertainment industry to accomplish maintaining subscribers. Sure their subscriber growth is great but their new subscriber cost is over 1000 dollars and their average subscriber doesn't keep a subscription nearly long enough to make that possible.

[Financial River]

Profitable* not possible

[Mikie713]

Back in the 80s, the geek in me dreamed of what kind of international programming I could pull in from a pre-Directv satellite dish. Cable never did it for me, HBO just wasn't enough. I have been literally dreaming of what Netflix has become in 2018 for decades. The best part about it is it's even better than I imagined. I'm sure I'm not alone.

[Victor Dergunov]

Mikie,

You summed it up very well, right there with you man...

[Jay Boy]

Bubble away while it plays. It must get 75% of the stream viewing in the prime times, which it is closing in on and 8B more content may not be enough to head off Bezos, but I trade this little baby because they put out EXCELLENT content and as long as they do they will bubble. I like that word "bubble."

[kylethsmith]

I'm sorry Victor, I may have missed it in your article. How many subscribers does Netflix have?

[Victor Dergunov]

About 120 million right now.

[kylethsmith]

Awesome, thanks, I somehow missed the reference, despite the fact that it seemed to be included in every second sentence of your piece.

Perhaps now you could explain to me how Netflix is somehow the kind of content with it's $8B a year budget, as compared to Disney with it's $7.8B + Fox's 8B (which it is about the acquire), and considering Netflix 5 year library of content and brands vs Disney's 94 year library of content and brands.

[Victor Dergunov]

KS,

Because the content Netflix produces is the best in the industry... Despite having big budgets networks like Disney, Time Warner, Fox, and others produce a lot of "junk"... Most of Netflix's programing is quality...