An expert: despite good financial figures, difficult years await
Netflix (NASDAQ: NFLX) has grown from a small DVD rental store to the global market leader in streaming services. But the picture is not so bright from the point of view of the future development of the company: its shares are overestimated, thinks the columnist of Realnoe Vremya, economist with long banking experience Artur Safiulin. In the following column in our journal, the expert explains the reasons and sets a reasonable price for the company’s stock at $ 230-250, not $ 528 today. The success story of the past does not guarantee that rates will rise in the future, that’s what broker websites write. And that goes for Netflix, he is convinced of it.
A little bit about the history of the company’s development
The company appeared in 1997 when its founders decided to test a new model of selling and renting DVDs on the Internet. A customer could see a catalog of films on the website and obtain and return them by mail. The store was designed to be completely virtual. The idea turned out to be a success and the big advertisers quickly started to take an interest in the company. Toshiba therefore offered a free rental of three Netflix DVDs to buyers of its new DVD recorders. They were followed by Pioneer, Hewlett Packard, Apple, Sony. The number of Netflix subscribers has increased with the surge in recorder sales. After an offer to buy from Amazon (the owners then decline it), the company refuses to sell DVDs and focuses entirely on rental (by expanding the film catalog, by buying the rights to film studios) and creation a system of movie recommendations based on search history, ratings and user reviews.
In 2003, the company was listed on the NASDAQ for $ 15 per share, after which its rates rose steadily. In 2005, the number of subscribers reached 6.5 million, while Netflix sent a million records to its subscribers daily. Advances in increasing the speed of the Internet and video streaming in particular enabled the company to launch a streaming service in 2007, which offers customers the ability to watch movies and shows anytime ( the format says on demand). The subscription model is a fixed monthly fee for unlimited access to content. First, you could only watch a thousand movies and TV shows. By comparison, the company’s online catalog contained over 100,000 DVDs. Today, the company’s subscriber count has reached 208 million people, and the service offers series, feature films and documentaries of different genres and in different languages ââin 190 countries around the world. In addition to buying content from other producers, the company is making its own, for which it has already been awarded (this year the 36e Oscar nomination among distributors). The pandemic has brought about 30 million new subscriptions.
Current situation and stock market
After the record year in 2020, the rate of growth in the number of subscribers suddenly declined. In the first quarter of 2021, the service registered 4 million new customers (the number of 6 million was mentioned in public plans). The company plans to attract just one million new subscribers in the second quarter (which matches the level of 2013 when the company launched its own content). The drop in pace is caused not so much by the cancellation of the blockages as by the activity of rivals in the person of Amazon, Disney, HBO Max which are seriously increasing their customer base and investing in the purchase and production of foreign content. . Netflix grew slower than the same HBO Max, even in the United States in the first quarter of 2021.
A decline in subscriber growth is the only programmed indicator the company has not met. In general, the financial situation is stable. The results for the first quarter of 2021 are good. Revenues in particular totaled $ 7.16 billion (24.2% more than the analogous indicator in 2020), profit is $ 1.71 billion (140.7% growth), earnings per share was 3.75 (+133.85%), net profitability amounted to 23.83% + 93.9%).
The stock market is crazy about these successes, and the growth momentum in capitalization since 2016 is impressive: from $ 97 in July 2016 to $ 528 per share in July 2021, or about 444% increase, that is to say 90% on average a year. The company is part of FAANG (the five big American technology companies with Facebook, Amazon, Apple, Alphabet (Google)).
Apparently, the business is starting to take off and rates have stagnated for the past six months. Many experts think the share is overestimated, and here’s why:
- New players are rapidly taking over the market. Netflix’s share in the US fell 9%, while the number of big rivals in the market rose from five to seven in just one year, from 2019 to 2020. Big-wallet companies – like Disney and Amazon – invest a lot of money. to develop streaming services. For example, Disney plans to attract $ 35-40 million in new subscribers per year through 2024. They can really squeeze Netflix out of the # 1 position in terms of subscribers, now Disney has 146 million people.
- A big problem is that the main rivals have parent tycoons behind them who can subsidize lower prices for subscriptions. It’s a big question how long Netflix will stay in such a war. An expansion of the customer base has been the only source of growth for the business as it is impossible to increase subscription prices for customers – this threatens to further market loss.
- The high activity of its opponents makes the company more expensive – marketing spend has doubled in the last two years: the price of content by a third increases (producers give more to those who pay more, that’s the market rule anyway); its own content production costs are rising. All of this leads to a situation where the costs of an average user in the United States (with a plan of $ 14 per month) are only reimbursed in three years. The term in other countries is five years. We have to keep in mind that the number of subscribers is increasing mainly in the world, not in the United States.
- There is another paradoxical moment: the company managed to save a positive free money flow (the money after operating profit). To put it simply, to be profitable by reducing your own content production expenses, the increase in subscriptions has fallen. Now Netflix plans to invest $ 17 billion in production, but it looks like the time is up and the efficiency of those costs will prove to be low. It’s another brick in a growing spending boat.
- The current market assessment is based on the assumption that the business will gain new customers, i.e. it will grow. But the need to remain profitable allows it to control production costs and does not let the company “grow” (what investors and the market expect). This is Netflix’s dilemma these days. As soon as the market realizes that endless growth is over, there will be a significant correction in the company’s shares. And a 50% drop isn’t the end, actually.
Considering all of the above, it would make sense to stay away from this transmitter. 2021 will be decisive for the company – rates will not increase, while a correction is possible depending on the performance of the company. It will be interesting to see if such a forecast is confirmed.
The author’s opinion does not necessarily coincide with the position of the editorial by Realnoe Vremya