Over the last few months the Netflix share price has enjoyed a decent rebound from its September 2019 lows. The sharp decline last summer came about as a result of concern that the company’s ability to add new subscribers was starting to slow, along with worries that a raft of new kids on the block might eat into its market share.

Netflix share price in focus as profit beats estimates

While some of these concerns have subsided, they are no less valid, given the number of players in what is becoming an increasingly competitive sector. Last night’s results saw Q4 profit beat expectations by some distance, coming in at $1.30 a share, well above the consensus of $0.53 a share. Revenue came in at $5.47bn, also above estimates. As a result, Netflix's share price, which finished 0.5% lower on the day, rose 2.3% in after-hours trading following the results.

For the last few years Netflix, along with Amazon Prime, have arguably had the online streaming market more or less to themselves, however the arrival of Disney and Apple to the party in the last three months has the potential to change the game quite significantly over the next few years. As the global number one streaming service, Netflix is acutely vulnerable to the much deeper pockets of two of the world’s biggest brands, however for now it still commands a healthy lead over its peers.

US subscriber figures disappoint

Last night’s Q4 numbers showed that Netflix still remains way out in front, as the company smashed it out of the park on new subscriber numbers, adding 8.76m, well above its 7.6m target. Despite this outperformance there was a downside, and that was weakness in the US, which only saw the company add 420,000 new subscribers, well below its 620,000 target.

There is little doubt that this miss was probably down to the launch of Disney+ and Apple TV+ in the last quarter, however if this is indicative of what might happen internationally when Disney and Apple launch in Europe later this year, then Netflix may well have cause for concern.

Forward guidance underwhelms

This concern seems to be borne out in its guidance for the upcoming quarter, with the company disappointing some investors by saying that it expects to add 7m new subscribers in Q1, while generating revenue of $5.73bn, and profits of $1.66 a share. In terms of the top and bottom line this doesn’t seem too shabby compared to the recent quarter, however subscriber growth does appear a little unambitious, compared to recent quarters.

In fact, Q1 in the last two years has generally been a decent quarter for Netflix, the company seeing the addition of over 8m new subscribers, in both the first quarter of 2018 and 2019, with Q2 generally seeing a bit of a slowdown, as well as generally being the weakest during a calendar year. As such this weak guidance is a surprise in what is seasonally a fairly strong quarter for the streaming giant. It thus raises the question as to why so cautious?

Management has suggested that elevated churn levels in the US may impact its numbers, but this has been happening in the last few quarters so is nothing new. It seems more reasonable that Netflix are concerned that the entry of a host of new content providers at cheaper prices may well limit its ability to grow its subscriber base in international markets. It is still the most expensive streaming option, which means not only does it have limited ability to increase prices, but it also has to offer a significant value add to justify that to not only keep its existing customers but also acquire new ones. Thus far the premium price is a price worth paying, bur whether that will continue to be the case in 12 months’ time remains to be seen, as Disney+, Apple TV+, and a other new content providers get their offerings off the ground in 2020.

Netflix remains the market leader

For now, its hits which included Oscar contenders 'The Irishman' and 'Two Popes' appear to have done the job, but there is no doubt that Netflix’s future success will depend as much on its ability to add new subscribers at a pace that allows it to create new content, without sending its debts even higher. In October Netflix raised another $2bn in debt to fund new content, with the company set to spend $18bn over the next 12 months. The company also said it remained some way short of generating positive cashflow, but hoped to be cashflow-positive by the end of 2020.

The one advantage Netflix does have which doesn’t get a lot of attention is heavy investment in non-English content, which sets it apart from its peers, so while its new challengers are likely to make life more difficult for the streaming pioneer, it still remains well out in front as the market leader.

 

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