Should Netflix, Inc. (NFLX) Stock Fear … Snapchat?

The latest quarterly results from Walt Disney Co (NYSE:DIS) highlight the secular challenges in the traditional cable TV model. Yet again, Disney has reported weakness in its ESPN division as more consumers opt to pull the cord. And yet again, Netflix, Inc. (NASDAQ:NFLX) have to love what all this means for Netflix stock.

Should Netflix, Inc. (NFLX) Stock Fear ... Snapchat?

Netflix isn’t exactly seeing the same problems as Disney. Note that during its last quarter, revenues shot up by 36% to $2.15 (a record) and the company added 3.6 million new subscribers (the total is now at 86.7 million).

Netflix’s strategy of creating original content has been spot-on. More importantly, NFLX is getting traction in foreign markets, as seen with the success of the Narcos series. And yet, Netflix stock has been a laggard, sporting a breakeven return over the past few months.

So … what’s the problem?

NFLX Faces Threats From All Sides

One nagging issue is competition. The traditional media industry has been waking up to the new reality of the entertainment business — and it does not want to be Uber-ized.

As a result, there is now a plethora of streaming options (with compelling content) from Hulu, Time Warner Inc’s (NYSE:TWX) HBO, Showtime and CBS Corporation (NYSE:CBS). Meanwhile, mega online operators like Alphabet Inc’s (NASDAQ:GOOGL) YouTube Red and, Inc. (NASDAQ:AMZN) — which has the leverage of its Prime service — are applying pressure, too.

The good news for holders of Netflix stock is that CEO Reed Hastings knows how to adapt to competition and seismic changes in technology. He has already pulled off the herculean feat of transitioning NFLX from a DVD delivery service to online streaming!

But future threats might be more difficult to beat back. Media and entertainment appear poised for disruptive changes. In a recent interview with the Wall Street Journal, Hastings said:

“The competition we worry about is the substitution — when people are spending time on Snapchat or Facebook video or YouTube, or some new app that isn’t yet invented. In the long term, you have to believe that movies and TV shows will be like the opera and the novel, pretty nichey businesses.”

Wait. Snapchat?

Snapchat’s Threat to Netflix Stock

Yes, in the near-term, Snapchat could be one of the biggest thorns in NFLX. In fact, I recently talked to a co-founder who sold his startup to Snapchat, and he said the company’s mission is to destroy television.

Snapchat is not a prototypical Silicon Valley startup. For one, it’s based in Venice, California, so you’re looking at a much more entertainment-focused vibe and culture.

Snapchat is typical in that it features some eye-popping metrics:

  • 150 million daily active users
  • Reach of 41% of all 18- to 34-year-olds in the United States.
  • 10 billion video views a day (as of April)

Snapchat also is pushing the boundaries of mobile apps by moving aggressively into augmented reality (AR). This is the focus of Spectacles, which are fashionable glasses that allow users to seamlessly take photos and shoot videos.

Snapchat appears to be prepping for a massive initial public offering in the first half of 2017. The buzz is that the company could raise $4 billion at a valuation as high as $40 billion. If so, Snapchat will certainly be a major force in the new world of entertainment.

Bottom Line on NFLX

No, Netflix is not doomed. It boasts a number of incredible advantages, such as its large platform, engaging content and entrenched user base. Plus, Netflix stock could easily get juiced from a buyout, say from Apple Inc. (NASDAQ:AAPL).

But the reality is NFLX no longer has free rein in the U.S. market, and competitive forces should weigh on growth during the years to come.

Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own tax preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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