Thursday, October 28, 2021
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Netflix Stock – Why Netflix Has More Upside

– By Dilantha De Silva

Netflix Inc. (NASDAQ:NFLX) is the leading over-the-top content streaming platform in the world and distributes licensed content from third-party film studios along with its original programming.

For the better part of the last decade, Netflix was the only major streaming player in the world as Amazon Prime, Hulu and other platforms failed to gain traction to pose a meaningful threat to the company. Disney+, the streaming service launched by The Walt Disney Co. (NYSE:DIS) in late 2019, however, has already proven to be a major threat to the continued dominance of Netflix. The intensifying competition in the industry has resulted in a change in investor sentiment toward Netflix, but there’s reason to believe the streaming giant is still a good pick for growth investors.

The company continues to grow, but the stock has been flat for months

Netflix reported a 22% increase in global subscribers in 2020 to reach 203.66 million paying members and secured its leading position in the streaming industry. The mobility restrictions imposed by governments in early 2020 played a major role in this subscriber growth as Netflix and other content streaming platforms emerged as a primary source of entertainment for the majority of the global population. The company, in fact, more than doubled its initial subscriber growth expectations for 2020.

Number of Netflix subscribers (in millions)

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Why Netflix Has More Upside

Source: Statista.

Netflix stock rallied in the first quarter of 2020 as the company added more than 15 million subscribers, but in the last nine months, the stock has remained flat, though the S&P 500 index reached new highs during this period as investor focus shifted to the expected economic growth in the second half of the year. As illustrated below, the stock is up 50% in the last 12 months, but the stock has traded sideways since last July.

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Why Netflix Has More Upside

Competitive landscape

Disney+ has gained 100 million subscribers in just 14 months since its launch, whereas it took approximately nine years for Netflix to achieve the same feat. The exponential growth of Disney+ was supported by the serendipitous timing of its launch. In many countries, the service was initially made available during the beginning phase of the global lockdown. Another main competitor for Netflix is Amazon.com Inc. ((NASDAQ:AMZN)). With more than 150 million worldwide Amazon Prime subscribers who enjoy free access to Amazon Prime Video as part of their premium membership package, the e-commerce giant has the necessary scale to invest in original content to drive viewership in the future. As illustrated below, the number of Amazon Prime members in the United States has grown at a stellar rate in the last five years, which is proving to be a challenge for Netflix‘s dominance.

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Why Netflix Has More Upside

Amazon has access to billions of dollars if it decides to aggressively pursue the growth opportunities available in the streaming industry, which is something Netflix investors need to be wary of.

Overall, the competition in the industry is intensifying, which is generally a good thing for consumers. Netflix, as the leader of this fast-growing business segment, has not faced any meaningful threats since its launch, but things are likely to change in the coming years. The company, however, is making the necessary changes to its business strategy by focusing on original content creation to drive earnings growth, which is a strategy that could help Netflix grow for many years to come.

Local language original content will be a game-changer

Netflix has evolved dramatically in the last 10 years and is now considered the frontrunner in changing the landscape of the entertainment industry. Unlike other on-demand video distributors that are highly focused on distributing U.S.-produced content, Netflix has positioned itself in the international market as a truly global entertainment giant by introducing a library of content in local languages. The company remains focused on investing billions of dollars every year for the foreseeable future to capture market share in fast-growing international markets.

The streaming company has entered into content partnerships with local actors and producers in many important regions, including India, France, Brazil, Mexico, Japan and South Korea, to bring several original TV shows and movies in the respective local languages of these regions over the next couple of years, which could be a catalyst in helping it gain new subscribers globally. In the last 12 months, Netflix produced a few Japanese originals, a Columbia-set crime drama in Spanish and many Hindi originals to penetrate the non-U.S. market.

Local production is a big-budget task and requires an effective strategy due to different licensing rules and television trade norms. Netflix, because of its early-mover advantages, seems to be well ahead of the competition in identifying what works for international markets, and the company is planning to monetize this scale advantage in the coming years.

Takeaway

The rise of Netflix has been a game changer for the global entertainment industry. No other distributor has truly reached the level of Netflix when it comes to consumer reach and the depth of the content library. The competition is intensifying, but the company appears to be on track to retain its market leadership position for much longer, which should help it grow earnings substantially. The new-look Netflix is following a strategy that allows creative freedom by providing a platform for local content creators in densely populated regions, which is likely to accelerate the pace at which global consumers are embracing the content streaming industry.

Piper Sandler analyst Thomas Champion believes Netflix has more upside and recently wrote in a research note to clients that it “has demonstrated consistent subscriber gains and found success with modest price increases while offering unrivaled original content production and quality.”

The company is on track to deliver strong financial results in the coming years, although growth is likely to slow down. Investors should also acknowledge the fact the streaming industry is not a winner-takes-all market as an individual can easily pay for more than one subscription due to the low monthly costs charged by content streaming platforms.

Netflix will release its first-quarter 2021 financial results on April 20, which could be a turning point in the share price movement since CEO Reed Hastings is likely to shed some light on the company’s global market strategy in his quarterly letter to shareholders.

Disclosure: The author is long Disney shares.

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This article first appeared on GuruFocus.

Netflix Stock – Why Netflix Has More Upside

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