With almost 60 million total subscribers at the end of its fourth quarter, streaming movie giant Netflix, Inc. (NASDAQ:NFLX) is without a doubt a disrupting force among television viewers.
And the idea that competing streaming services from Apple Inc. (NASDAQ:AAPL) or Amazon.com, Inc. (NASDAQ:AMZN) will threaten Netflix’s lead and the outstanding gains of NFLX stock simply doesn’t make sense.
With Netflix still growing internationally, coupled with its portfolio of successful hits like House of Cards and Orange is the New Black, Netflix is still the hunter, not the hunted. Not only is NFLX forcing cable powerhouses like Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc. (NYSE:TWC) to rethink their business models, but CMCSA and TWC specifically are attempting to merge as means of survival.
Cord-cutting, spurred by Netflix’s success, is a real threat. Unlike in years past, there are clearer signs that the cable business model is breaking down. And that has become more magnified given that Apple recently unveiled its own Internet streaming service, looking to attract cord-cutters who tired of paying large cable/satellite fees that are often bundled with channels they don’t watch.
Even HBO wants a piece of the action. With its HBO Now standalone subscription service, HBO wants to draw in the cord cutters that much prefer an a la carte offering — one that allows them to pick and choose the channels/content they want to pay for. HBO’s standalone resonates because it will be independent of traditional distribution outlets from cable/satellite companies. But will it be successful?
For that matter, there still are questions to what extent Apple’s rumored movie streaming service can push the needle. Same goes for other over-the-Internet services like Hulu.
Who Can Legitimately Stand Up to Netflix?
To date, only Amazon’s Prime streaming service has shown it can standup to NFLX. And what do both companies have in common? Original content. And that’s what Apple and the likes of Hulu would need to deliver some level of success.
All of this affirms how Netflix CEO Reed Hastings placed the right bet on streaming, lessening the focus on its DVD delivery model. Netflix’s lead, combined with the investments the company continues to make in original content and international expansion, makes NFLX stock even more attractive.
Netflix’s international expansion strategy, which generated 2.43 million new foreign users in the fourth quarter, is its biggest differentiator with competitors. The company is growing internationally at a 40% rate, up from 1.74 million foreign users added a year ago. All told, Netflix is available in roughly 50 countries. And by 2017, Netflix expects to be available in 200 countries.
This means even if/when the U.S. movie streaming market becomes saturated, a competitor — say, Apple or Amazon — still would need to make up significant ground to develop the scale/infrastructure Netflix has built internationally. That’s not to be confused with lack of capital. Both Apple and Amazon might have the money needed to grow their streaming businesses overseas, yes. But to reach the same international scale as Netflix wouldn’t happen overnight.
While Apple does have the benefit of its large user base of iTunes, Apple would still lag Netflix in terms of original content. Dare I say, Apple buying Netflix would make more sense. It’s unlikely to happen, given Netflix’s market cap of $27 billion. But it’d still be better than having to play that level of catch-up.
And with analysts projecting Netflix to grow earnings at a 30% annually rate over the next five years, investors would be foolish not to buy the stock, given Netflix’s momentum.
On Friday, Citigroup analyst Mark May raised his price target on Netflix stock from $409 to $525, citing Netflix’s strong content. His target suggests 15% gains from current levels of around $454.
Add in Netflix’s dominant lead internationally, and NFLX stock may eventually reach its high analyst target of $550, yielding gains of more than 21%.
As of this writing, Richard Saintvilus was long AAPL.
