In the last five years, Netflix (NASDAQ:NFLX) has gone from being compared with CBS (NYSE:CBS) to being compared with Walt Disney (NYSE:DIS), and now Netflix’s spending trends are more similar to those of Disney than CBS. Can Netflix stock meaningfully advance despite the company’s significantly higher spending trends? Yes, it can, because the company’s overseas business will enable the momentum of Netflix stock to continue.
NFLX is investing $1 billion in ABQ Studios, an Albuquerque-based production studio with eight sound stages. The video streaming giant is also using its cash to lure top, behind-the-camera talent to its banner.
Netflix’s spending comes just ahead of its third quarter earnings report. Due October 16, the results are expected to feature 68-70 cents of earnings per share on revenue of about $4 billion. Even after the collapse of tech stocks took $50 off of Netflix stock, NFLX stock is still selling at a price-sales ratio of over ten, versus Tesla’s (NASDAQ:TSLA) price-sales ratio of around 3.25.
Winning the New Game
I’ve written before that while the “big four” networks were once CBS, Disney’s ABC, 21st Century Fox’s (NASDAQ:FOX) Fox Broadcasting and Comcast’s (NASDAQ:CMCSA) NBC, the big broadcasting players of the future will be Amazon.com (NASDAQ:AMZN), Netflix and Alphabet’s (NASDAQ:GOOGL) YouTube.
The metrics that will matter in the TV business of the future are how many paid subscribers you can bring to your streaming service, how much you can charge your subscribers, and to what degree you can satisfy them.
The key is data. If a broadcaster knows what people watch and can give them more of it, the broadcaster can meet all of its subscribers’ TV needs. While Disney, AT&T (NYSE:T), which recently acquired Time Warner, and even Walmart (NYSE:WMT) think libraries or demographic targets will enable them to take down Netflix, they have not been able to emulate Netflix’s “secret sauce” that keeps it ahead.
Nor do they have its global reach. It’s Netflix’s overseas expansion that has allowed Netflix stock to reach such high valuations.
Think Global, Act Local
NFLX had about 12 million more paying customers outside the U.S. than inside the country as of June. The company is expected to report that the spread has grown to 18 million when it unveils its Q3 results tomorrow. The number to look for will be 73, as in 73 million paid subscribers outside the U.S. Netflix’s only real rival in overseas markets is Amazon, and Amazon’s Prime video is not available in as many markets as Netflix. As long as Netflix’s overseas business has momentum, the high valuation of Netflix stock remains justified.
NFLX has used its own Open Connect technology, along with Amazon’s infrastructure, to expand to international markets. As a result, it could be vulnerable in the future to price hikes by Amazon Web Services. That’s why many have suggested that Netflix should merge with Facebook (NASDAQ:FB), which has a network of ten cloud data centers and undersea fiber linking them. I’ve suggested Facebook would be better off buying Disney, but five years from now Netflix could acquire Facebook instead.
To serve global audiences, broadcasters must have global production infrastructure. Netflix’s new production facility in Madrid, which is serving Europe, will be difficult to duplicate. Netflix is also doubling its employee count in India.
So while Netflix’s rivals like Apple (NASDAQ:AAPL), along with the media, are focused on the U.S. market, Netflix is way ahead of them.
Even in China, which most rivals have written off, Netflix has made a deal with Baidu (NASDAQ:BIDU) to get its content into the country.
The Bottom Line on Netflix Stock
Netflix is betting that programming infrastructure, not cloud infrastructure, is the key to becoming entrenched in international markets.
That’s a good bet, and it’s a strategy that continues to make Netflix stock attractive.
A half-dozen years ago, NFLX was playing chess with its streaming algorithm against the checkers being played by cable and broadcast networks. Against today’s “bigger” rivals like Disney, AT&T, Comcast and Walmart, NFLX is still playing chess, but on a grandmaster level. As a result, NFLX stock can still rise going forward.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, 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 T.
