When it comes to Netflix (NASDAQ:NFLX) stock in 2018, the good news is that the return came out to about 36%. This compares to -1% for Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), -5% for Apple (NASDAQ:AAPL) and -25% for Facebook (NASDAQ:FB).
But the bad news for NFLX stock is that the shares ended on a sour note for 2018. They have gone from $374 in late September to $267 at the close of the year.
Now, while much of this is due to the bearish sentiment on Wall Street, NFLX has still not been without its issues. If anything, the valuation had gotten to lofty levels, so profit-taking was reasonable.
Problems for Netflix
Netflix stock has also been impacted by the increasingly intense competitive landscape. Traditional media companies and cable operators are racing to build their own streaming platforms. Disney’s (NYSE:DIS) ESPN+ service has gotten off to a strong start and the company plans to start its entertainment offering next year, which will include content from Lucasfilm, Marvel, Pixar and Disney Animation. There will also be a benefit from the rich libraryies it got access to from the acquisition of part of Twenty-First Century Fox (NASDAQ:FOXA).
Then there is AT&T (NYSE:T), which recently acquired Time-Warner. For 2019, the company plans to launch a three-tiered steaming service, which will include one for movies, another for original programming and one for the Warner library. No doubt, AT&T will have the advantage of its massive mobile footprint.
In the meantime, mega-tech operators like AAPL, GOOG and AMZN will continue to invest heavily in their own services.
Another issue for NFLX stock is, of course, the large negative cash flows (which are expected to come to roughly $3 billion next year). The fact is that creating original programming is extremely costly. What’s more, the competitive forces are making things even worse.
All this sounds kind of scary, huh? Perhaps. But Netflix still has considerable advantages — and is likely to continue to grow for some time. The spending on original content has been the right strategy, and the company’s massive digital platform has allowed for much better targeting.
An example of this is the recent original sci-fi film, “Bird Box,” which stars Sandra Bullock. In the first week, about a third of the global subscriber base viewed it. It’s actually the strongest opening in NFLX history.
In terms of the overall strategy for original films, the company expects to produce 90 a year. This would certainly set it apart from rival studios (it’s typical to have 30 or fewer releases). NFLX has also been aggressive with snagging top Hollywood talent, like Ben Affleck, Dwayne “The Rock” Johnson and Martin Scorsese.
Finally, NFLX remains aggressive with its international efforts, especially in India. The country already has a large movie industry and a growing number of internet users. NFLX CEO Reed Hastings has indicated that India could bring in 100 million subscribers.
Bottom Line On NFLX Stock
With the volatility in the markets, I can understand why investors are gun-shy with investing in highly valued companies like Netflix, but the bull case still looks solid. After all, streaming is a powerful secular trend. According to eMarketer, about 50 million of Americans will abandon cable and satellite TV by 2021, up from estimates of 20 million made in 2018.
The good news for NFLX stock is that the company has become the top-of-mind brand in streaming and has a strong set of content offerings. There is also a massive subscriber base, which is at 137 million.
Now, there will likely be more volatility with NFLX stock. This is natural with a fast-growing company. But again, there are few signs of any slowdown in the business. So for investors with a longer-term perspective on things, now might be a good time to consider a purchase.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
