Stock Deconstruction

Netflix share price: what’s driving the streaming giant’s value?

Can Netflix’s [NFLX] share price keep rising? The 17-year-old stock has grown a staggering amount in its short lifetime, having ballooned over 30,000% to reach $366.60 as of Monday’s market close. Let’s compare that to the world’s current two most valuable companies: over its first 17 years on the stock market, Amazon’s [AMZN] value increased roughly 12,500%; Microsoft [MSFT], meanwhile, rose more than 28,000%.

Does that mean Netflix will someday outstrip the values of every other company in the world? Perhaps, perhaps not. Today’s world of high-growth, low- (or no)-profit companies is a completely different environment to Microsoft and Amazon’s respective 1986 and 1997 market debuts, and analysts are becoming sceptical of Netflix’s long-term growth trajectory.

Still, for now the numbers look good for Netflix. The streamer’s share price is up by 35.7% in the year-to-date and the company is a mere 14% off its all-time high of $418.97. Investors are optimistic in the short-term, with a consensus recommendation considering the stock an “outperform”.

World-record-holding trader Dan Zanger, who specialises in technology stocks, told Opto earlier this week that he’s carefully watching Netflix’s Q2 earnings report, released 17 July, and is expecting the stock to break out provided there is a positive earnings result.

What’s impacting Netflix’s share price?

Increased competition

Bearish traders are betting that Netflix will see its stock stall as competitors such as Disney [DIS], NBC [NBC] and AT&T Inc. [T] owned WarnerMedia launch their own services and continue to strip the streamer of popular titles made by their studios.

NBC Universal has pledged to remove The Office off the Netflix platform by 2021 and WarnerMedia is moving hot property Friends to its upcoming platform HBO Max in 2020. As these are two of Netflix’s most-watched shows, investors believe that the company will not only have a weaker value preposition, but will also be forced to increase its spend on original programming – pushing it further into its near $12bn debt.

This is despite the fact that share price barely moved upon news of the comedy titles leaving the streamer. But these plays do not stand alone: Disney has also pledged to take back a list of its most-watched movies, making this a trend.

 

Cash burn

Such moves are a problem for Netflix, which is raising another $2bn in debt financing, having built out a programming portfolio to reduce overreliance on other studios’ libraries in the future.

While Netflix’s revenue has increased by +30% year-on-year since 2016, it has also generated an increasing amount of cash burn. In 2018, for example, the company earned over $15bn in revenue, but spent $12.04bn on content creation.

30%

Netflix's revenue increase year-on-year since 2016

  

The company knows this is a problem. The Information reported in July that Ted Sarandos, Netflix’s chief content officer, has been briefing executives to reign spending in. But will it be able to keep up with competitors with fewer exclusive smash hits such as Stranger Things, House of Cards and Orange Is the New Black on the line-up?

Netflix’s woes lie in the long-term, or more specifically in how it will manage its debt in the future – particularly as it faces new competition.

The streamer’s bosses have suggested that its cash burn will peak in 2019 at $15bn. While the company will continue to spend on original and licensed content, it believes it can recoup lost cash by raising subscription prices and members.

 

Slower growth

So far, investors have given the company the benefit of the doubt, but there are some signs of a slowdown in the company’s figures. Netflix’s earnings per share show an increase of 190.7% from 2016 to 2017 to $1.25. The following year, the streamer delivered an increase of 114.4% year-on-year, at $2.68. For the 12 months to March 2019, Netflix saw an EPS increase of 87.92% at $2.80 – highlighting slowing growth.

Analyst estimates for Netflix’s Q2 2019 results also pin earnings at $0.56 per share – 34% lower than a year ago, where it came in at $0.85.

When looking at the streamer’s price to earnings ratio, which has seen a slowdown from 402.32 by the end of 2015 to a current 133.30 – it appears Netflix’s share price has become more expensive as sentiment toward the company, in the face of new entrants, has levelled off.

Netflix closed the most recent trading day at $366.60. Shares of the stock have risen 3.2% since its last quarterly report on 16 April, not far off the S&P 500’s 3.7%, but well below Nasdaq’s 15.36% gain.

 

Market cap$160.68bn
PE ratio (TTM)131.25
EPS (TTM)2.80
Quarterly Revenue Growth (YoY)22.20%

Netflix share price vitals, Yahoo Finance, 16 July 2019

 

Reasons to remain optimistic

Despite some signs of trouble, Netflix continues to have a long list of backers. Novus, a research firm that tracks the moves of prominent institutional investors, says that Netflix shares owned by hedge funds rose in the first quarter of 2019, unlike that of Amazon, Google and Facebook [FB]. Tiger Global, Point72, Third Point and Citadel have all upped their positions in the stock in Q1.

These investors still see an opportunity in Netflix because it continues to provide strong earnings and is forecasted to do so for some time. Over the next five years, analysts expect that the streamer will grow sales by 22.47%. This year, they expect an earnings increase of 51.45%.

 

The international edge

Such forecasts are largely down to Netflix’s expected international growth. While the US market becomes increasingly saturated, the streamer added almost 23 million international members in 2018 and expects 12.6 million new international members through the first half of this year. As a result, Netflix is expecting to grow to nearly 250 million paid subscribers by 2024.

250million

Paid subscribers by 2024 expected by Netflix

  

Meanwhile, competitors Disney and WarnerMedia have both admitted that it would take some time to develop their international business, particularly as they are tied to a range of international licensing deals. By comparison, Disney only expects to have amassed 75 million total subscribers by 2024.

If the company can pull off price hikes without affecting subscription rates in the long-run, and reduce its debts, it would still be way ahead of the competition.

Some of these issues will be confronted this week during Netflix’s Q2 earnings, where the streamer is expected to address questions on subscriber growth, if price hikes are eroding demand, the impact of its rivals, and how it is monetising its original content.

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