Netflix (NFLX) shareholders are all smiles today. Netflix stock was catapulted higher Thursday morning after the on-demand video company reported earnings that topped estimates after the close on Wednesday.
Specifically, Netflix posted a profit of six cents per share, when analysts were only expecting earnings of four cents per share of NFLX. Subscriber growth soared to a pace of 3.3 million too, bringing the total up to 65.6 million members. And revenue of $1.64 billion was another record-breaker for the company.
On the surface it’s all very encouraging to those who own — or were mulling — a position in Netflix stock. To put it bluntly, though, anyone who interpreted the Netflix earnings report from Wednesday as evidence that the company is now officially bulletproof is taking a short-sighted stance.
There are three factors (at least) that could easily create serious problems for this already fragile Netflix stock.
Apple Cable TV
In March of this year, Apple (AAPL) announced it would be beefing up its Apple TV offering by crossing a line that had never been crossed before. For the first time ever, network broadcasts (ABC, CBS, FOX, NBC, etc.) would be available online rather than limited to the live feed delivered through a traditional coaxial cable.
While not every network is on board with Apple (yet), the company has garnered enough support to suggest the new era of video content-delivery is finally here.
The game-changer, and the reason an Apple-coordinated cable television package could weigh in on the value of Netflix stock, is the likely pricing of the service.
While Apple has neither confirmed nor denied the price range of the yet-to-be-launched service, experts peg the monthly cost at somewhere around $30 per month for the 25 or so channels the pay-TV service would offer.
While that’s decidedly more expensive than a Netflix subscription, it’s decidedly less expensive than the average monthly cable service cost of $55 per month consumers are paying now. At that price, though, the addition of network programs might be just enough of a reason for cost-conscious, cord-cutting consumers who don’t currently have cable television to drop Netflix and start accessing prime-time programming again.
Comcast Corporation Now, Others Later
OK, Comcast Corporation (CMCSA) and its recently announced streaming service may not be the only threat to the value of Netflix stock by way of direct competition. Hulu has been available since 2007, Amazon (AMZN) has offered on-demand video since 2008, and HBO Now has been available since April. None of them, however, seem able to dent the growth Netflix is enjoying.
So what makes this week’s launch of a streaming video service from Comcast — simply called “Stream” — a legitimate threat to NFLX? For one, it offers a variety of on-demand programming including HBO’s programming. But it also offers network broadcasts delivered through the online service whether or not that subscriber is also a cable-television customer.
At a price of only $15 per month for the Comcast service versus $8 per month for a Netflix subscription that doesn’t include network programming, Netflix customers may finally have reason to rethink things.
There is one catch. Only Comcast broadband subscribers can purchase the Stream service, limiting the reach of the initiative. Ultimately, though, it doesn’t matter. If the model works, there’s no reason other cable/broadband service providers like Time Warner Cable (TWC) won’t follow suit, and end up collectively squeezing Netflix out of the picture.
Netflix Earnings (or Lack Thereof)
Last but not least, owners of Netlix stock may sooner than later learn the hard way that the Netflix business model is one that simply doesn’t lend itself to wide profits — and possibly no profits at all.
The “value add” Netflix brings to the table is an aggregator of content from several sources packaged into an easy, simple-to-use package. The bigger the company’s customer base gets, however, the more expensive it becomes to lease that video content. Indeed, the strong-arm tactics suppliers of all its video content have used at the bargaining table borders on extortion.
Why? Because these suppliers can.
There was no viable outlet for all this digital content just a few years ago. In the wake of the success Netflix has created for itself though, studios and distributors have found several new other venues through which they can sell their movies and television programs. Hulu is one of them. Amazon is another. The video content part of the Apple iTunes store is another. The upcoming launch of an online-streaming service from Verizon (VZ) will be another.
Competition is nothing new, and most of the time competition is dealt with by cutting expenses so you can lower pricing, while simultaneously making sure you create the most marketable product you can. Netflix is only doing one of those things … making the product more marketable. Expenses, however, are rising faster than revenue.
Netflix CEO Reed Hasting has acknowledged content costs will likely rise through next year. After that, though, he says the company will be able to reliably produce a profit.
What he’s not explained in any way, shape, or form, however, is how the company’s rapid rise in content costs is simply going to stop growing without causing an equally abrupt end to revenue growth. Until that clarity surfaces, 2017’s expectation for significantly wider profit margins is little more than a wish for Netflix stock.
Bottom Line for Netflix Stock
While the storm is brewing, current owners of NFLX know as well as non-owners that none of these risks have mattered yet. Until the market cares about things like earnings, the stock may remain a great trade.
Just don’t fool yourself into thinking it’s an investment in a company that’s going to remain in favor forever. Eventually, something’s going to trip up Netflix stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
