Netflix Stock Is All About The Innovator’s Dilemma

Even with the run-up in the stock price, there should be more upside for Netflix

The rally since the December lows has certainly been impressive. But as for Netflix (NASDAQ:NFLX), it has made this bull move look kind of tame. Since late December, the shares have soared from $234 to $360 — or about 53%.

NFLX: Netflix Stock Is All About The Innovator’s Dilemma
Source: Netflix

Now, NFLX stock has a pretty good track record anyway. Consider that for the past decade the average annual return has been a blistering 51.8%!

This really goes to how important major changes can be with large markets. It’s essentially about the innovator’s dilemma — a concept developed by Harvard professor and entrepreneur Clayton Christensen in the 1990s — where the incumbents cannot react quickly enough. The main reason is fear of cannibalizing the existing business.

But this can prove fatal. Over the years, we’ve seen how industries can be disrupted, such as with (NASDAQ:AMZN) in e-commerce, Uber with the taxi cab business and (NYSE:CRM) with enterprise software.

With Netflix stock, the main catalysts for the disruption opportunity have been the availability of high-speed internet access and pervasiveness of smartphones. But there has also been a move towards affordable subscriptions. The result is a secular change in how people consume entertainment content.

The trend is clearly evident with cord-cutting. According to research from eMarketer, about 50 million Americans will abandon cable and satellite TV by 2021, up from 20 million this year.

By being a first mover, Netflix has some significant competitive advantages that should last for quite some time. The company’s name has become of top-of-mind for streaming. The company also has a lead in critical areas like AI, which has allowed for more effective content creation. And yes, there is the scale of the user base. There are currently about 139 million subscribers across 190 countries. In other words, Netflix is winning the “land grab” of the streaming opportunity.

To put things into perspective, look at some of the findings from Lab42, a market research firm. About 89% of streaming subscribers are customers of Netflix and the renewal rate is 93%. By comparison, AMZN’s is at 75% and Hulu’s is 64%.

With high levels of customer loyalty, NFLX has been able to build a substantial recurring revenue stream. It also means the company is in a position to periodically increase the pricing.

Bottom Line On Netflix Stock

No doubt, there are notable risk factors for Netflix stock. The competitive environment is getting more intense. Some of the rivals include Disney (NYSE:DIS), CBS (NYSE:CBS), Amazon, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL).

Although, interestingly enough, the most recent Netflix shareholder letter notes that the wildly popular game, Fortnite, is much more of a competitor! The reason is that it is essentially a big draw on people’s attention.

Another nagging issue is that content development can be dicey. Even with the power of analytics, there could still be a string of flops. Zynga (NASDAQ:ZNGA) is definitely an example of this. Despite having a large user base and large amounts of data, it has had a tough time creating engaging new titles.

But for NFLX, there are few signs that the company is losing its touch in creating standout content. For example, its movie Bird Box has been streamed in 80 million homes.

True, Netflix stock is far from cheap, with the forward price-to-earnings ratio at 54X. But then again, as we’ve seen over the years, this hasn’t been much of a factor anyway, especially as the company should remain a leader in the disruption of the entertainment market.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC