Is the Netflix binge coming to a close?
Who doesn’t love a good Netflix binge? From “Stranger Things” to “Orange is the New Black” and “The Crown,” there’s something for everyone from the world’s largest internet entertainment provider. Users certainly aren’t worried about the future of streaming as more and more people cut the cable cord and flock to streaming services like Netflix. Currently, there are around 125 million global subscribers, and the service is expected to add 5.5 million more.
But not everyone is confident that the binge will continue for the pioneer of streaming services.
Are You Still Watching?
Netflix had a good second quarter in 2018. Despite a recent dip (which didn’t last long) and missing its own forecasts for user growth, its top line was up, and earnings per share were positive. But all this up and down scares stakeholders. Even though analysts expect the value of Netflix to be at 145 times earnings forecasts (compared to the average 18 times), many don’t see Netflix stock as a positive investment.
While the company is now worth more than even Disney ($20 billion more to be exact) it isn’t fooling forecasters with its high numbers, and some are worried that the binging bubble may burst. Worried that the stock has run up too quickly, UBS analyst Eric Sheridan changed his target on Netflix stock from a “buy” rating to “neutral.” So why, given its high stocks and price tag, aren’t analysts more confident? According to some, losing the ability to trade high with great numbers means a maxed-out valuation.
Yet the “too good to be true” attitude isn’t the only reason experts are worried.
Here are a few of the problems keeping experts from settling in for a marathon binge.
The streaming giant owes a lot of money. It currently owes around $8.5 billion and its chief executive, Reed Hastings, said the company will continue to borrow billions of dollars for many years.
Netflix is also currently spending a lot of money. Rather than purchase titles, Netflix is investing in over 700 of its own projects, featuring big names in both acting and directing. It’s that spending that has some experts guiding investors away from the stock. Not only is the company expected to burn through more cash this year than years past, but it will also burn through what it spent in a year in just two quarters. A company that isn’t making money isn’t typically a sound investment. While that splurging may rack up its debt, it’s a strategic move on the part of Netflix. Producing the amount of original content Netflix has been able to crank out has given the company a significant edge over the competition, and since Netflix doubled down on its content efforts, the subscriber numbers flourished. It’s a double-edged sword as it fends off competitors but also requires big spending, and Netflix is expected to dish out $7.5 billion next year. It has clearly found success with original content as it was the big winner at the 2018 Emmy nominations. Its extensive menu of both purchased and original content makes Netflix the default streaming service of choice for those joining the cable exodus, but, it’s important that Netflix does what it can to stay ahead of the competition.
Competition is Coming
As streaming media controls the remote control, traditional media is fighting to get in on the action. Giants like Disney and Fox are investors in Hulu, Amazon Prime and Apple, and are coming in hot. Disney is even planning on starting its streaming service in 2019, and that means pulling its content from Netflix (say goodbye to titles like “Pocahontas,” “Lilo & Stitch” and all your favorite Pixar movies). Because everyone loves a good Disney movie, any site Disney launches will probably be met with excitement and a rush to sign up, and that could mean a dip in subscribers for Netflix.
However, the competition problem can be met with a solution Netflix is already employing: great, original content. That means spending more, but – in the long run – it will be worth it to keep the company’s place at the top of the streaming pyramid.
Play Next Episode
While these are all legitimate worries given the stock’s most recent slip, there doesn’t seem to be a realistic end in sight for the home of shows like “Making a Murderer,” “House of Cards” and “Santa Clarita Diet.”
Given the good and the bad, it’s no doubt that Netflix is a tricky stock to track, and even experts are having a hard time predicting what it will do next. Still, it’s not hard to guess what Netflix will do next, and that is spend money. As it spends more, the company will go further into debt – which means it will need to make that debt up to creditors with a higher yield, resulting in higher interest payments and a depressed net income.
The answer to all its money woes is subscribers. As long as Netflix keeps producing interesting, quality content, turning its cash burn into profit and maturing with the competition, there’s no reason Netflix shouldn’t continue to add subscribers and grow its valuation.