2020’s shuttered cinemas and locked-in audiences made Netflix’s [NFLX] share price a clear stay-at-home play, with the streamer’s stock climbing over 67% last year. Yet since the start of 2021, Netflix’s share price has seen reduced demand, having gained just 4.79% year-to-date.
It could be that investors have already filled up on FANG stocks, but that’s not to say there is no opportunity left in Netflix’s share price — especially as it is currently muscling out commercial and pay-tv services across Europe.
Commercial television loses ground to Netflix
It is tempting to think of Netflix as a “disruptive innovator”, upending traditional ways of watching television. However, its innovating days may be over, as we now live in an era where Netflix is the norm. According to Ampere Analysis, Netflix is now the second-biggest television group in Europe by revenue.
Local operators like ITV [ITV.L] and the BBC might have valuable local productions to draw in a domestic audience, but even this type of programming is under threat. Netflix has invested over $1bn in European productions, including Lupin in France, Dark in Germany, and The Crown in the UK.
While ITV has had to slash its production budget as advertisers cut spending due to the coronavirus, budgets were meagre compared to Netflix or Disney [DIS] even before the pandemic. The first season of Disney+'s The Mandalorian cost $120m, which is almost as much as ITV's entire annual production budget.
Can Netflix be stopped?
The production budgets may be high, but can big money productions guarantee dominance for Netflix?
In Scandinavia, Stockholm’s Nordic Entertainment Group [NENT] is holding its own in a strong second place to Netflix, and it could offer a model for others to follow.
According to Ampere Analysis estimates, Nent has 3 million subscribers in Sweden, Denmark, Finland and Norway. While that’s still some way off first place Netflix’s 4 million, no other local provider comes so close to challenging Netflix's European dominance, according to the Financial Times. That includes big pay-tv providers like Sky [SKT] and commercial operations like ITV.
Nent's comparative success could be because it was a relatively small operation in Scandinavia when it decided to make the switch to streaming. Quite simply, it had less to lose in advertising revenue by becoming a low cost subscription service in 2014.
Over the past 12 months, Nent's share price has had a similar trajectory to Netflix, gaining over 41.2% compared to the US streamer's 47.6% gains (as of 8 February’s close). According to the FT, Nent's next step is international markets, including the US, where it plans to position itself as a specialist Nordic service.
Netflix's share price gains over past 12 months
In the same period that Netflix and Nent's share prices have gained, more traditional broadcasters have lagged. ITV's share price has fallen over 18% in the last 12 months and BT's more than 20%.
Nent’s nimbleness shows that other European operators could have to change business models and the way in which they deliver content if they’re to disrupt Netflix’s dominance.
Where next for Netflix’s share price?
Whereas Netflix previously had to source debt to cover productions, it is now generating enough cash to fund its own productions. With more cash comes the opportunity to invest in bigger budgets and more content — Netflix is planning to release one new movie a week this year. It is also starting to pay down its debt pile, after years of having doubt surround its business model.
The fear that subscriber numbers would slow down as a result of the number of new streaming services available have proven unfounded – at least so far. Netflix now has over 203 million subscribers, having added another 8.5 million in the fourth quarter. It appears that viewers are prepared to have a Disney+ or Amazon [AMZN] Prime subscription alongside Netflix.
Number of Netflix subscribers
That’s good news for a player like Nent, which has specialist content on offer, but less so for companies like ITV or Sky, which could see their viewer numbers fall. Should Netflix begin investing in sports content, the drop for traditional broadcasters could prove even more extreme.
“Longer term, it would not surprise us if Netflix is more open about moving into new verticals such as sports, or if it takes a more opportunistic approach to acquisitions,” Morgan Stanley analyst Benjamin Swinburne wrote in a January note to investors.
“Longer term, it would not surprise us if Netflix is more open about moving into new verticals such as sports, or if it takes a more opportunistic approach to acquisitions” - Morgan Stanley analyst Benjamin Swinburne
Swinburne upped his price target from $650 to $700, and has an overweight rating on Netflix.
The dominance of Netflix suggests they too will have to up their game to keep investors interested. Among the analysts tracking the stock on Yahoo Finance, Netflix’s share price has a $618.07 target, which would see a 12.8% upside on its current price (as of 8 February’s close).