A few years ago, it was common to cast doubt on Netflix (NASDAQ:NFLX) stock. Was the premium content strategy too expensive? Was the global expansion too risky? What about the competition, such as from traditional mega media companies?
But of course, Netflix has been able to dispel the doubts by demonstrating a consistent growth ramp. The upshot: Netflix stock would become more valuable than companies like Disney (NYSE:DIS).
Yet the latest earnings report has brought back some of the concerns. Consider that there was a loss of subscribers in the U.S., which was the first time in eight years. What’s more, the 2.83 million adds in global markets was well off the consensus forecast of 4.81 million.
Yes, somehow NFLX stock does not seem so invincible anymore. Since early July, shares have dropped from $382 to $318. In fact, for the past year, the return is a miserable -9%.
The Risks for Netflix
Now, all this is not to imply that NFLX stock is headed for some kind of implosion, though. Let’s face it, the Netflix brand has become synonymous with streaming, which is a megatrend in the entertainment business.
The company also has built a solid technology infrastructure — powered by sophisticated AI (artificial intelligence) — and a proven system for creating compelling content. NFLX also has a head start in global markets. Keep in mind that there are 91.5 million subscribers outside the US.
But on the other hand, Netflix stock really does face some tough issues. For example, we’ll soon see a flood of new streaming services hit the markets during the next year from heavyweights like Disney, AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA). They all have large distribution footprints to leverage as well as extensive film libraries. So, with more choices, more consumers may be tempted to dump their Netflix.
Interestingly, the traditional media companies are playing hardball as well by ending licensing agreements for their content. Such franchises like The Office and Friends — which have not been renewed for NFLX — are actually the most watched on Netflix.
True, CEO Reed Hastings remains highly confident. In his letter to shareholders, he noted that his company will have additional resources to invest in even more original content.
But there is a hitch: after years of development — with little competition — why haven’t Netflix’s own shows been the most watched?
Well, for the most part, spinning up hit shows is more than just about quality talent or compelling concepts. There’s also some luck involved too. After all, even the best companies in the entertainment industry go through periodic dry spells.
In the meantime, the costs of creating new content is escalating. Keep in mind that NFLX is also getting more aggressive with creating its own feature films, adding to the risks.
The Bottom Line on NFLX Stock
The valuation on NFLX stock is definitely far from cheap, with the forward price-to-earnings ratio at 56 times. This premium has been mostly due to a few key factors: the company has shown consistent growth and Netflix stock is an easy way to get exposure to streaming.
Yet these advantages could slip away. On the growth side, the emerging competition could take a toll. And of course, in terms of investing in streaming, there will be more ways to do this, such as with Disney or AT&T — at much cheaper valuations.
In other words, NFLX stock could face more difficulties in the months ahead.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
