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Netflix: Business Model Needs To Change

Mar. 10, 2020 6:56 PM ETNetflix, Inc. (NFLX)AAPL, AMZN, DIS13 Comments


  • Netflix's domestic slow-down and international expansion will take a toll on profitability.
  • Negative Free Cash Flow can be turned around, but not enough to justify 300$/share.
  • With an expected return near 5%, investors should look elsewhere.

Thesis Summary

Netflix, Inc. (NASDAQ:NFLX) has become the undisputed king of video streaming services. However, recent changes in the market and competition are threatening Netflix's superiority. Giants like The Walt Disney Company (DIS) and Apple Inc. (AAPL) are coming in with a strong competitive advantage. This will lead to lower margins and force Netflix to have to "reinvent" itself.

Along with the impact on earnings, having to supply more content for their revenue will continue to affect the balance sheet. Asset turnover has been falling consistently over the last 10 years, and all this Capex is affecting cash flows and financial strength. Given the facts, it doesn't seem like the trend is going to reverse in the immediate future. Therefore, we are bearish Netflix.

Company Overview

Netflix has been offering VOD streaming services for the last 20 years. Starting as a simple website with a pay-per-rental system for its content, it switched to the now so popular subscription model in 1990. In 2002 the company went public for $15, achieving funding of $82.5 million. One year later, it would reach 1 million subscribers. Finally, in 2005, Netflix launched its streaming video service domestically. During the next 10 years, Netflix would capture most of the U.S. market and expand internationally, putting Netflix at the forefront of the streaming service industry.

Growth and market share

As Netflix has come to dominate the streaming market, the outstanding market share and revenue growth (the company has achieved a 10-year CAGR of 28.11%) in recent years are the main reasons why investors have enjoyed such great returns.

Data Source: Seeking Alpha

Source: CNBC


While Netflix still offers DVD services, it is the streaming service that is the main driver of revenue and growth. The costs associated with the streaming service can be divided into two parts: Licensing, and

This article was written by

James Foord profile picture

James Foord is an economist by trade and has been analyzing global markets for the past decade. He leads the investing group The Pragmatic Investor where the focus is on building robust and truly diversified portfolios that will continually preserve and increase wealth.

The Pragmatic Investor covers global macro, international equities, commodities, tech and cryptocurrencies and is designed to guide investors of all levels in their journey. Features include a The Pragmatic Investor Portfolio, weekly market update newsletter, actionable trades, technical analysis, and a chat room. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (13)

one of the few stocks that barely went down, i love netflix but just like gold starting to go down, this could go to 100/150 next week. cuz no dividend and people are scared/ will only go for safe solid profitable dividend stocks like every crisis, second leg of the crash.
johnfairplay profile picture
NFLX's business model has the stock up over 10 percent YTD, while virtually every other stock is down YTD.
daschwantz profile picture
I think there are a few things that shareholders need to think about as risks in these down markets.

1) NFLX hasn't moved down nearly as much as the markets have, on the assumption that 'it is a stay-at-home stock that will benefit', however it is not known that this would actually increase new subscriptions in saturated markets with the highest margins, or instead allow people to watch everything left that they care to watch and cancel / churn to a new streamer
2) In a recessionary situation, people will return to illegal formats rather than paying for subscriptions, especially with so many new providers. NFLX is not immune from this, especially when they need to keep raising prices to improve cash flow. They currently have $3USD plans in India...will they really be able to raise these prices AND keep to projected subscription growth rates during a downturn?
2) High yield bond markets are extremely stressed right now, and the low rates NFLX pays on debt is due to ONE thing alone - bondholders know that the equity has value that can be tapped if and when needed. In other words, they are expecting NFLX to do a share offer when necessary to keep bondholders from getting too itchy. in down markets this becomes much more likely, and when it does happen shareholders never have an opportunity to exit their position before the repricing happens (after hours).
ShermanMcCoy profile picture
1. effect will be neutral to positive, not negative.

2. marginal effect only, irrelevant overall.

3. NFLX bonds are well bid - zero assumption of equity mkt put.
That's just naive. 1. Netflix releases multiple new shows every week, you can never watch them all. You may burn through all Disney classics you want to catch up, there's always something new with Netflix. 2. Netflix is the price of a lunch. Most people are willing to pay that for convenience and quality alone. 3. Low interest rate only makes it cheaper to finance new loans, while Netflix is still negative on cash flow.
granko profile picture
Author stating ARPU value of 1/5 for non-US consumer (vs US) made me stop reading this article - did author make any effort to look at and compare Netflix prices worldwide? I.e. in many European markets Netflix subscription is priced higher than in US... extremely myopic
$9 vs $13 today. It may get to 50% overtime, but it will never be 20%.
ShermanMcCoy profile picture
Projections garbage = valuation garbage = conclusion garbage.
OP doesn't know nothing about Netflix, just like bears before him. International markets will have a higher margin than US, because the cost is much lower, competitions are mostly local content providers and they don't have the global scale. Netflix made money heist a global phenomenon, and for non English speakers, who cares it's English or Spanish. Soon Netflix will have 300M users, with 75% or more users and 2/3 revenue from offshore.
Joseph McCarthy Censoring what I have to say it’s like living in Russia or Cuba
nerd_rage profile picture
"Moving forward, Netflix must use its weight to acquire local production and film studios around the world and integrate them into their network."

Why? Netflix can fund original production just fine now. They currently do fund a massive amount of original shows and movies, as any Netflix subscriber can attest. Every day there's something new, and guess what, most of it is disposable junk. I have no particular reason to sample (just checking the new crap today) "The Tiger King," "Freud" or "The Letter to the King." Next week those will be shoved aside for a new pile of shows and movies of no particular appeal (although I might check out "The Platform" just because it sounds so demented).

What Netflix needs: big brands. it doesn't have any and its competitors do. Disney makes one Mandalorian and resells it to the world while Netflix makes ten shows for ten territories at a tenth of the price of The Mandalorian, and they all look a tenth as good.

Result: Netflix is fully stocked with garbage that rarely seems worth sampling, while their competitors can use existing global brands as built-in promotion. And that is the biggest threat facing Netflix: without their own global brands, they can't be efficient enough to keep up.

Netflix does have a way out of this trap. It's not easy but they might as well try: develop their own global brands that play well across multiple territories. Then turn them into franchises. Both Stranger Things and Witcher seem to have this potential. Netflix should keep developing possible franchises even if most flop (remember Bright?)

And forget about sports, Netflix is wise to steer clear. Sports and news have the same problem: they are hard to globalize and they lose value too quickly. When Netflix gets a new subscriber in Chile or Indonesia tomorrow, the whole Netflix library is brand new to that person. House of Cards may be seven years old but those new eyeballs recharge it with value all over again.

Can't do that with a football game from seven years ago, and the guy from Chile or Indonesia has a different idea of what football means anyway, and he wants to see his local teams. I'm not convinced it even makes sense to globalize sports like entertainment.
Ron Burgundy’s Hair profile picture
What did you think about the hiring of susan rice as an expert on videos?
I agree on sport. On recognized brands, they for sure help: developing themselves is tough, it manageable, like HBO did for many years and Netflix is trying to do now securing deals with creative people. A safer play is to acquire a solid IP holder and develop from that base, like Iger and Disney did phenomenally with Marvel and Star Wars, for example. There, you can get MGM, AMCX or VIAC. Good purchases at today’s prices plus premium.
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