It’s All About the Land Grab Right Now for Netflix, Inc. Stock

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Netflix stock - It’s All About the Land Grab Right Now for Netflix, Inc. Stock

Source: Via Netflix

Netflix Inc. (NASDAQ: NFLX) has become the global leader in streaming entertainment. I’m the first to admit that I never thought Netflix would get this big, that Netflix stock would go as high as it has, or that NFLX would be able to raise the billions of dollars that they have put into original content.

I certainly can’t speak for all 1,000 hours of programming that Netflix has turned out over the past year, but what I have seen has been outstanding. Netflix stock is benefiting from some really terrific programming and it seems to be finding favor with the tens of millions of Netflix subscribers.

Premium Streaming Brand

What has become apparent is that streaming content providers are rolling out more slowly than I expected, and more slowly than I think others anticipated. Consequently, we are still in the midst of slow-motion “land grab”. While other streaming services such as Hulu and Amazon.com Inc. (NASDAQ:AMZN) are in play, they are not producing original content as quickly as Netflix is.

The strategy here seems obvious. Netflix wants to become the dominant premium brand before other services can effectively challenge that dominance. The more entrenched Netflix is as a “must-have” streaming service, the more difficult it will be for another service to dislodge it — and the better the prospects are for Netflix stock price.

The prevailing view, and one that I agree with, is that most households will end up with at least two or possibly three streaming services. Much of that depends on the extent to which traditional distributors of cable and satellite television remain relevant. (For the record, I believe they will remain intensely relevant.)

That leaves the question as to which streaming services are going to win the race. Presently, it seems that as long as Netflix produces quality content, it will remain in place as a core household product and Netflix stock will do well.

The Competition

In looking at all the other major streaming players at this point, what we see is that 17% of Netflix subscribers also subscribe to Hulu. 61% of Hulu subscribers also subscribe to Netflix. All the other major streaming service subscribers subscribe to both Netflix and Hulu.

Mind you, I wouldn’t describe the other services as even being “major streaming services” at the present time.

That is going to change, though, and the most likely big new entrant into the space will be The Walt Disney Company (NYSE: DIS). It will, however, take years to roll out its new platform and attract subscribers in significant enough numbers for Disney to make a run at supplanting Netflix or Hulu. However, Disney will very likely become one of these core household products.

Disney content is just too good, appeals to so many people and will have gobs and gobs of new content available to it thanks to everything being put out by Marvel Studios, Lucasfilm, and Pixar. That doesn’t even mention Disney’s core studio operations, and its television channels.

Bottom Line on Netflix Stock

What does this mean in terms of whether Netflix stock is a buy or sell? As I say all the time, the state of Netflix stock price today is that it is insanely overvalued — not just based on present earnings, but on earnings stretching out for the next 10 years.

To a certain extent, a premium valuation on Netflix stock is justified. Netflix is the premier provider. It is throwing billions of dollars at new content in order to maintain that status. It wants to build on its lead as much as possible, so as to make its dominant position insurmountable and the content is generally very strong.

But a $137 billion valuation is just ridiculous.

That doesn’t mean Netflix’s stock price today doesn’t make for a great trade. Personally, however, I prefer Disney stock. I think it is undervalued based on the long-term possibilities for the entire studio, of which streaming services would only be a small part.

There’s another thing to consider: Netflix had to draw down tons of debt in order to fund the billions of dollars in content production it is generating. Disney not only has billions of dollars on the balance sheet, but generates billions of dollars in free cash flow every year. Disney can also access the debt markets and obtain debt at a much cheaper rate than Netflix can. So, if Disney really wants to ramp up its content production, there is no reason why it can’t do it at the same rate, or even at a higher rate, than Netflix.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns DIS. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

 


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