Netflix, Inc. (NFLX) Stock and the Problem No One’s Talking About

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Netflix, Inc. (NFLX) stock, through yesterday’s close, was up a remarkable 131% in 2015. That easily makes it the best performer in the S&P 500, outpacing Amazon‘s (AMZN) calendar-year gains by about 30 percentage points.

Netflix, Inc. (NFLX) Stock and the Problem No One's Talking AboutThose incredible gains have been fueled by rapid subscription growth and its burgeoning international business. And much of that growth can be chalked up to the fact that NFLX licenses reruns of popular TV shows from the major networks.

And yesterday, Time Warner Inc. (TWX) CEO Jeff Bewkes basically came out and said he was sick of licensing his company’s best content out to Netflix only to see NFLX become more powerful at the expense of cable TV’s long-term prospects.

TWX isn’t the only company that feels that way, and in the coming years we could begin seeing fewer and fewer popular cable TV shows on Netflix, making its service less attractive and hindering subscriber growth.

NFLX’s Other Content Problem

The well-known problem with Netflix’s current content strategy is that content costs are rising quickly, largely due to intensifying competition with Amazon Prime Instant Video and Hulu.

But the other, newer issue is that networks are becoming more reluctant to license their content to NFLX at all — at any cost. That’s because cable TV subscribers are shrinking, and without them, cable companies essentially fail to have a business. Nomura estimates that just 2.2% of the major TV networks’ revenue will come from streaming video licensing this year.

Time Warner’s CEO Jeff Bewkes said on an earnings call yesterday that,

“We are evaluating whether to retain our rights for a longer period of time and forego or delay certain content licensing. This would effectively push the [subscription video] window for content on our networks to a multiyear period more consistent with traditional syndication.”

Twenty-First Century Fox Inc (FOXA) is also fed up with the business model that seems to be working in NFLX’s favor, and indicated in September that it would be changing the way it approached digital licensing.

Oh, and Discovery (DISCA) has also voiced its opposition to continuing to support the unsustainable practice.

Bottom Line for NFLX Stock

Thankfully for NFLX, it does have highly successful original programming of its own that should continue to pull in subscribers. It also tends to ink multiyear deals with networks, so it’s not like they’ll be able to pull the plug on those with the snap of a finger.

Still, this should be a real concern for NFLX going forward, as it’s clearly becoming a victim of its own success. CEO Reed Hastings knows that merely licensing shows like Breaking Bad have been responsible for a meaningful portion of his company’s subscriber growth in the past, and that those gains won’t come so easily in the future.

At the end of the day, it puts a bigger burden on Netflix’s shoulders to develop even more of its own original content — an expensive and grueling process with no guarantees.

While shares have enjoyed a massive run in 2015, the coming years will likely not be so kind to NFLX stock, and at a forward price-to-earnings ratio of 435, you have to wonder when investors themselves will start reconsidering their Netflix endorsement.

As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/netflix-nflx-stock-tv-network-licensing/.

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