With the holiday season fast approaching, retail stocks have been in the spotlight. However, video streaming service provider Netflix Inc. (NASDAQ:NFLX) should be on your radar as well because the firm is gearing up for a big year in 2018. NFLX stock already is trading at all-time highs, but don’t be put off by its meteoric rise. The firm still has further to climb.
Netflix has a solid game plan for the upcoming year and investors who stick around are likely to be rewarded.
Original Content
One part of Netflix’s business that has gotten a lot of attention has been the firm’s focus on original content. The company has poured billions into developing multiple hit series and that’s expected to continue into 2018. In 2018, NFLX management says it is planning to spend somewhere between $7 billion and $8 billion on programming with an end goal of eventually having original content make up half of it’s total library.
That’s a big deal because the benefits of original content versus licensed programs is still unclear. According to Nielsen, original content isn’t actually all that popular when you compare it to “back catalog,” or licensed shows. The ratings service claims that its studies show that people spend only 20% of the time they spend streaming on original content.
On the surface, those claims make NFLX’s strategy look frivolous, but there are other factors to consider. First of all, the Nielsen ratings aren’t exactly comprehensive because they only take into account what people are watching on TV, not what they’re watching on tablets, computers and smartphones. Secondly, original content plays a massive role in driving subscriptions and renewals, a huge part of NFLX’s business.
With NFLX upping its subscription prices, it is important that the company maintains its place as most-popular streaming service. Many people are willing to pay monthly simply to keep up with some of their favorite shows. As long as Netflix is able to continue producing hit shows, the firm will have greater price elasticity.
International Growth
Another reason I believe NFLX stock price will continue climbing in the year to come is the fact that the firm has a lot of growth opportunities as it pushes its service further afield.
Last year Netflix made its service available in 190 countries across the globe, and I think we’ll start to see those investments pay off in the coming year. Because NFLX uses its own customer data to make its service better, it takes time for the firm to gain traction in new markets. Netflix has proven itself to be successful analyzing customer data to determine what provides customers with the most value and tailoring the streaming experience depending on local tastes.
The other reason NFLX is likely to be successful in its expansion efforts is that the company’s customer satisfaction ratings have been impressive. That makes it’s free-trial an extremely effective tool in hooking in new subscribers. NFLX’s massive customer database means that the company can provide users with a hard-to-resist value proposition during their trial period.
Don’t Believe the Bears
One of the biggest criticisms on NFLX stock has been the firm’s cash-burning practices. The firm’s negative free cashflow suggests that content is costing more than it’s generating and many believe that the heavy spending will eventually cause the stock to unravel.
I don’t disagree that taking on massive debt loads is worrying from an investment standpoint. However, I also believe you have to look at debt comparatively. Although there’s no question that Netflix has a lot of debt, it is not as bad as it might seem compared with the firm’s media peers.
Netflix has long term debt of $4.89 billion while most of its media peers have debt burdens of $20 billion or above. Netflix is also considerably smaller than most media firms, though, so a better comparison would be of the firm’s debt-to-equity ratio. Netflix has a debt-to-equity ratio of 146.93. That is on the high end of the spectrum, but it ’=is not far off Comcast Inc.’s (NASDAQ:CMCSA) 107.75 and comes in below Charter Communications’ (NASDAQ:CHTR) whopping 198.81 debt-to-equity ratio.
The point is that it’s not uncommon in the media space to borrow money upfront in order to fund a future project. It’s also prudent to note that NFLX has been taking away market share from most of the media giants, so their $20 billion-plus debt piles are much more vulnerable than Netflix’s own sub-$5 billion obligations.
The Bottom Line
Netflix is a great growth play. The firm has delivered excellent returns over the past decade and is likely to continue doing so as it raises prices and expands internationally. While NFLX’s lofty valuation has made it much more difficult to imagine it becoming a takeover target, I wouldn’t completely rule out the possibility. As streaming continues to disrupt traditional cable, NFLX stock will be a winner in the industry and investors who aren’t already on board should consider taking a position now.
As of this writing, Laura Hoy was long NFLX.
