For Hollywood it is the best of times and the worst of times. It is a time of unbridled prosperity for independent producers, and of the financial guillotine for Harvey Weinstein. It is love in the time of Netflix Inc. (NASDAQ:NFLX).
Netflix stock hit new highs after earnings that exceeded expectations, adding 5.3 million new subscribers despite a price hike. Then, the shares fell back as investors began worrying about the change the company has brought the industry.
Netflix now has a market cap of more than $84 billion. That’s more than Time Warner Inc (NYSE:TWX), the entertainment conglomerate AT&T Inc. (NYSE:T) is buying. It’s almost twice the market cap of Twenty-First Century Fox Inc (NASDAQ:FOXA), with its cable networks, TV network, and movie studio. It’s the richest valuation, too, with a price-to-earnings multiple of nearly 200 when Walt Disney Co (NYSE:DIS) sells at 17.
For Hollywood it is the best of times and the worst of times.
The Age of Netflix
What 2017 has shown is that we have entered the Age of Netflix. Appointment television is out. Binge watching is in. Cable is out. Streaming is in. Corporate suits are out. Independent producers are in. Channels are out. The cloud is in.
The new power metric is subscriptions, and the ability to raise prices on those subscriptions. Netflix’ third U.S. price increase since 2014 now has a top rate of about $14 per month, still short of Time Warner’s HBO Now at $15 per month. There is room for more.
Source: Statista
There are also more subscribers, over 109 million worldwide. This is what puts Netflix ahead of any other U.S. based provider. It is a global footprint, with content now being produced in a variety of languages, for a variety of cultures. Netflix has shown that its new model can be replicated.
And, NFLX has also shown that it can keep those customers. Carlos Gomez-Uribe, VP of product innovation at Netflix, recently wrote that subscriber monthly churn is in the low single-digits. “Reduction of monthly churn both increases the lifetime value of an existing subscriber and reduces the number of new subscribers we need to acquire to replace canceled members.”
So why the recent pullback in the stock?
The Posse is Growing
Start with competition.
Disney’s decision to get into streaming on its own and pull its content from Netflix is a blow. Amazon.com Inc. (NASDAQ:AMZN) is competing directly with Netflix for many shows. YouTube Red from Alphabet Inc (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) are looking for shows. Apple Inc. (NASDAQ:AAPL) looms. It could still buy either Netflix or Disney. And, the old world, in the form of Hulu streaming and HBO Go, remains.
Measurement is another bugaboo. Netflix says 8.4 million people now prefer to “binge race” their favorite shows, cocooning for days at a time to watch multiple seasons, in order. Nielsen Holdings Plc (NYSE:NLSN) is starting to offer the equivalent of streaming “ratings,” so producers know more about how their content is doing and can drive harder bargains with services like Netflix.
This raises the question of just how far the $8 billion Netflix has set aside for new content will go.
So, Buy or Sell NFLX Stock?
You buy tech companies ahead of their growth, not their valuation. You get off the train when the growth slows.
Netflix’ market cap represents almost 10 times last year’s sales. To keep the price high, it must maintain its 25% year-over-year growth rate, and its 5% profitability. Investors must continue to ignore its negative free cash flow, or the fact that its 33% budget hike is higher than that growth rate.
Netflix is clearly near the top of its growth arc, which is why our Tyler Craig recommends call spreads to get the most value from an investment our Luke Lango recommends.
My own view is tied more to the state of the stock market than to the state of Netflix. The whole market is stretched, rising faster even while earnings growth slows. I have become more conservative this year, having seen recessions take out half my money twice this century, and having a reached an age where I can’t afford to wait for the rebound any more.
I think it more fun to watch Netflix than to buy it. If you do choose to buy, be ready to get out fast, with options on lower prices that give you time and profit from a sudden downdraft. When the show ends in this crowded theater, the cry will be “fire.”
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and FB.
