Industry Spotlight

Netflix [NFLX] share price threatened as competitors claw at subscriber base

Last week Netflix [NFLX] surpassed yet another frontier in the entertainment space by bagging four Oscars and engraining itself further into the world of Hollywood. While its movie Roma missed out on best picture – nabbed to the spot by Universal Picture’s Green Book – it took home the prize for best cinematography, best foreign language film and best director.

The wins have added to Netflix’s latest bout of share price momentum that it’s seen since the start of the year. Shares are up 33% year-to-date, with a price hike announced across the US and Canada in January, also being well received by shareholders, who hope the move will add to revenue and cash flow.Netflix share price performance, CMC Markets, as at 6 March 2019

 

Netflix’s year may however get tougher from here, as it contends with an influx of streaming competitors, both old and new. There are already signs that memberships appear to be slowing slightly, with Q1 2019 expected to achieve growth of 24.6% YoY, compared to the 25.9% and 25.45% growth seen in the two previous quarters.

 

Market cap$154.69bn
PE ratio (TTM)132.20
EPS (TTM)2.68
Total debt/equity (MRQ)197.76

Netflix stock vitals, Yahoo finance, as at 6 March 2019

 

These figures may be further impacted as Disney [DIS], Apple [AAPL] and AT&T [T] are all set to launch competitive platforms this year. But there are also some strong existing competitors that are growing in strength including US-based Roku [ROKU], and China’s iQiyi [IQ], which are putting the platform through its paces.

 

Roku [ROKU]

Roku reported $742.5m in net revenue for its 2018 full-year results last week, up by 46% year-over-year. It also added 7.8 million active accounts taking its subscriber numbers up to 27 million in the US.

The news sent its shares up by 25% when the results were reported in February, and it’s now up 125% year-to-date.Powered by CMC Markets, as at 6 March 2019

 

While these figures will take some time to catch up to the $4.19bn Netflix brought in for its full-year 2018 results, Roku is optimistic about its long-term growth in particular.

“While our growth has been impressive, we believe we are still only beginning to capitalise on the large opportunity streaming presents,” said the company in a note to shareholders.

“We expect to reach US$1bn in revenue in 2019, by focusing on these key areas: increasing monetisation per user and scaling the number of households using the Roku platform.”

A William Blair survey has shown that just 27% of US consumers who use streaming services, use Roku, highlighting the space in which it can grow.

27%

Amount of US consumers using streaming services, who use Roku

This is particularly poignant as Netflix subscriber growth in the US is slowing. The streamer missed expectations for its Q4, 2018 results, as shareholders expected an addition of 1.8 million users, but just 1.5 million were delivered. The streamer’s growth has largely come from the international market, where it added 7.3m subscribers.

 

iQiyi [IQ]

Last week, Chinese streaming platform iQiyi beat analyst expectations and reported $1bn in revenue, up by 55% year on year. The platform also saw its subscriber numbers grow to 87.4m during the quarter, up by 72% year-on-year.

The platform has been instrumental in getting Chinese viewers accustomed to paying for higher-quality programming, creating excitement for shareholders. The streamer’s shares have soared this year, growing by 82.5% year-to-date.Powered by CMC Markets, as at 6 March 2019

 

With a large population and a growing middle class, China is a desirable market that’s often hard to crack as the global entertainment industry faces a range of governmental restrictions to take their content to the territory.

Netflix chief content officer Ted Sarandos admitted in December at the UBS Media Conference that the streamer does not have “much of a China strategy” and that it does not plan to make a big investment in the territory, leaving a large space for competitor platforms.

CEO Gong Yu said: “Our subscriber numbers constantly hit new highs and our revenues continued to scale and diversify. 2018 was also a transition year for us as we shifted more resources toward producing original content. We believe it will help us build a stronger platform and IP powerhouse over the long term.”

“Our subscriber numbers constantly hit new highs and our revenues continued to scale and diversify” - iQiyi CEO Gong Yu

The next challenge will be if these three streaming stocks can keep up user and share price growth in the midst of new entrants in the streaming space by established film and TV veterans like Disney and AT&T.

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