Despite growing revenues 24% last year, with members up nearly 15% and net income up by nearly half, Netflix (NASDAQ:NFLX) is down on the year. NFLX stock will open around $504 after starting the year near $540.
Despite a market cap of $219 billion, which is higher than AT&T (NYSE:T), Netflix remains a volatile stock. Hollywood and New York both thrive on rumor, and despite appearing egalitarian they’re both small, closed clubs. Netflix has barged into both, upending the system, and the former incumbents don’t like the new rules.
The question you must ask before investing today is whether they can do anything about it.
A Closer Look at NFLX Stock
Netflix today is the King of Hollywood. Sorry, Walt Disney (NYSE:DIS).
Netflix shows would dominate TV ratings, if they were still relevant and if they were available. The fact is, they’re not and they usually aren’t. Since Netflix still carries no advertising, the company doesn’t have to tell anyone how big its audience is.
When it chooses to do so, the numbers are huge. The series Bridgerton has been watched by 63 million. The Queen’s Gambit has been watched by 62 million. Other series have numbers from 30-50 million. By way of comparison the top network TV show last year, NCIS, drew an audience of 15.4 million.
Instead of measuring ratings or box office receipts, reporters are left breathlessly reporting on what’s being added to the Netflix platform or coming off it. Netflix sets the market. Everyone else can only follow.
While Hollywood began turning to streaming en masse with prices ranging from free to $10/month, Netflix’ global audience grew despite a price increase that brought the top tier to $18/month.
Disney+ can claim an audience only half Netflix’ size, despite a bundle with the ESPN+ service and Hulu at $13/month. Amazon.com’s (NASDAQ:AMZN) PrimeVideo also has about 100 million viewers, but they’re bundled with free shipping on packages.
The Price Is Too High
The problem for Netflix stock is simply its valuation and the market’s changing fashions. Netflix’ price-to-earnings ratio is around 81. That’s higher than Amazon, which is at 71.
Its price-to-sales ratio is nearly 9, with $25 billion of annual revenue against $218 billion in market cap. That’s matched only by Facebook (NASDAQ:FB) among large companies, and Facebook had $38 billion of cash flow last year. At Netflix, cash flow remains negative.
Netflix had the best year possible in 2020, because of the pandemic. It’s trailing that growth in 2021. It could try to push through another price increase. But Disney is claiming it will pass Netflix’ current audience by 2024, with $8-9 billion to be spent that year alone on new content.
The Bottom Line
Netflix still has big advantages over Disney. It bases decisions on data, while Disney still depends on franchises and producers’ guts.
Netflix also has some levers it can pull to bring in more revenue. It can sell rights to old shows. It can create an ad-supported tier. It can license its characters and content in every direction Disney can.
Netflix CEO Reed Hastings has prepared his company to meet the challenge. But Netflix is all grown up now. It faces a host of competitors. Big numbers are hard to grow. Its valuation needs to reflect that, and that may be at a lower price than currently.
At the time of publication, Dana Blankenhorn directly owned shares in AMZN, T and FB.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.