I am more than happy to admit any time I’m wrong about a company, and when it comes to Netflix, Inc. (NFLX), I was dead wrong.
The surge in competition did not cause a rapid deceleration in U.S. subscriber growth. In fact, subscriber growth accelerated, and Netflix looks poised for yet another good quarter in Q1.
While there is no debating this strong performance on behalf of Netflix, investors must realize that the negative story for NFLX stock is still very much intact.
Netflix Proves Me Wrong
Back in November I highlighted a serious threat to Netflix that I thought would quickly cause lofty year-over-year revenue growth and margins to cripple. That threat was increased competition.
NFLX is without question the market leader in subscription over-the-top (OTT) video services, with eMarketer estimating that more than 114 million consumers in the U.S. watch Netflix. Clearly, this suggests that the upside for U.S. subscriber growth is limited, and with the number of legitimate OTT competitors growing by the week, it seems reasonable that Netflix could suffer near-term.
However, with ongoing competition from the likes of Alphabet Inc‘s (GOOG, GOOGL) YouTube and Hulu, along with new competition from services like Verizon Communications Inc.’s (VZ) Go90, Sling TV and content providers Showtime, HBO, CBS Corporation (CBS) and Nickelodeon all having skin in the game, the future certainly seemed bleak for Netflix and NFLX stock.
But instead of suffering, Netflix added 1.56 million new U.S. subscribers — better than the 1.3 million it guided for, and far better than the 880,000 it added during the third quarter.
Something to Consider
With that said, it is important to keep in mind that many of the new OTT services just launched in the last two quarters. Furthermore, monthly services prices are cheap enough for OTT services, relative to pay TV, that consumers may be compelled to maintain two, even three subscriptions at a time. In retrospect, this fact might explain why Netflix continues to perform well in spite of new competition.
Nevertheless, the newness of competing OTT services still creates a long-term risk for Netflix. It is still too early to know whether the creation of these new OTT services will steal Netflix subscribers long-term, and since NFLX is the unquestioned leader in this space, this is a threat that investors must weigh.
Regardless, despite Netflix proving its doubters wrong in Q4, and providing very strong guidance for Q1, it is worth noting that Netflix stock is still down 11% this year. Also, Netflix stock is down since announcing earnings.
Not Wrong About NFLX Stock
The reason for this performance ties into Netflix’s valuation, and is why I may have been wrong about the company, but not its stock.
I explained at the end of last year that Netflix stock is gearing up for another epic 2011-like collapse, and that there is not much NFLX can do to stop it. Sooner or later, momentum runs dry and valuations start to matter.
In this case, Netflix has a market capitalization of $45 billion, comparable to that of media/content giants Time Warner Cable (TWC) and Twenty-First Century Fox (FOXA). The problem is that both TWC and FOXA have nearly as much operating income as NFLX does revenue, thereby illustrating just how much larger the two companies are than Netflix.
Fact is that Netflix stock is priced for perfection, even down 11% this year. While Netflix investors are fixated on the company’s global subscriber count, NFLX does not have the pricing power upside internationally that it has in a near-fully penetrated U.S. market. Thus, it is hard to imagine Netflix growing three to four times larger or maintaining its explosive growth long-term, two things that must happen for it to support a $40 billion-plus market capitalization.
In other words, Netflix’s strong earnings performance and guidance coupled with the underperformance of NFLX stock essentially proved my theory correct: There is not a lot of stock upside from this point forward, no matter how well the company performs.
Thus, it is time to move on!
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
