Netflix, Inc. (NASDAQ:NFLX) reports earnings in a few days, and the common thought across finicky minds is: Just how much room does NFLX stock have to grow?
The bearish track points to NFLX spending too much on original content, an increasingly competitive space and a possible ceiling on domestic subscriber growth as reasons to abandon NFLX stock.
But closer inspection says otherwise.
NFLX has some high valuation metrics, sure, but this is a company that’s still expected to aggressively grow for years into the future.
Over the current year, for instance, NFLX is expected to grow earnings at a phenomenal 64% … as long as Netflix earnings for the current quarter don’t disappoint, of course.
Heading into Netflix’s report, here’s a look at why NFLX is still the pay TV service to beat.
NFLX Subscribers
If Netflix’s subscriber growth was ever in question, the Los Gatos-based company just tweeted an impressive number: 10 billion hours of content streamed during the first quarter, equivalent to “about 905,892,833 seasons of House of Cards.”
This number is important for two reasons. One, it’s evidence that NFLX subscribers are addicted to the content Netflix serves up (on arguably the best streaming platform interface). Two, even if NFLX comes in south of its projected 61.4 million subscribers figure, the heavy use of its platform cushions the blow.
In fact, it’s this number that should really attract investors to NFLX stock, as continued domestic subscriber growth is predicated on contented Netflix users telling their friends and family about these awesome shows they can’t stop watching.
This binge-watching model was completely unproven just a few years ago, but it’s since become a viable method of storytelling and an important cog in how Netflix differentiates its service from linear TV providers such as Comcast Corporation (NASDAQ:CMCSA) and DirecTV (NASDAQ:DTV).
While linear TV series compete for prime time slots, Netflix series grow over time, allowing NFLX to purchase entire seasons without committing to a pilot, or demanding that the pilot episode condense the gist of the series in 30 minutes to an hour.
It’s a model that attracts the kind of creative talent that NFLX needs to distance itself from the competition. And speak of the devil …
Original Marvel Content
Netflix recently signed on to produce five new shows based on Walt Disney Co (NYSE:DIS) franchises from Marvel, from Daredevil to several as-yet-untitled series about superheroes Jessica Jones, Luke Cage and Iron Fist. These four shows will operate as TV’s counterpoint to the cohesive Marvel universe on film, united by “The Avengers.” On Netflix, these shows will come together in one mini-series, “The Defenders.”
Ask Netflix’s chief content officer Ted Sarandos, however, and it’s not such a risk:
“We were taking what I thought was a pretty measured bet on someone with a great track record of serving a very discriminating fan base.”
The only other network to have live-action Marvel content is the Disney-owned ABC, but as the reviews for “Daredevil” rush in, it’s clear the Marvel universe on Netflix offers a higher potential, as told by this Washington Post review:
“If ABC’s “Agents of S.H.I.E.L.D” and “Agent Carter” were solid singles that stretched into doubles as they moved along, “Daredevil” is a first-pitch home run. Yet “Daredevil” shouldn’t be overly compared to what Marvel has aired on TV, because the Netflix show smartly exploits being free of broadcast limits.”
Netflix in a League of Its Own
NFLX stock fell on the HBO Now announcement, but it has become clear HBO Now isn’t the competitor we thought it could be in terms of affecting Netflix’s subscriber growth. If you have a cable subscription, it’s cheaper to add on HBO for a paltry $5 a month (on Xfinity) and use its HBO Go app for mobile viewing rather than fork over $14.99 a month for HBO Now — twice the price of Netflix.
I have cable, but I also subscribe to Netflix, because you simply can’t get NFLX content with a cable subscription. Likewise, you cannot get HBO with a Netflix subscription.
The likelihood: Internet TV services will co-exist, with HBO subscribers wanting Netflix for its exclusive content and vice versa.
Bottom Line
Netflix is projecting global coverage by the end of 2016 (from around 50 countries today), with a boom in global profits set for 2017.
Nomura Managing Director Anthony Diclemente said NFLX is “going to be the most powerful media company in the world.” While that seems like a dramatic stretch, there clearly are plenty of positive drivers that should push NFLX ahead in coming years.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
