The streaming video giant Netflix (NASDAQ 🙂 had a good start to the year. His share remains the best performing of 2019 compared to other top technology companies.
The shares have so far risen 34% to $ 358.82 this year, bringing the best profit to top technology companies, including Facebook (NASDAQ :), a 25% increase, Apple (NASDAQ: NASDAQ :), an increase of 16% and Amazon (NASDAQ: NASDAQ :), an increase of 9.5%.
Netflix weekly chart
Despite this remarkable run, the year goes to one of the most challenging for the company that has changed the way people consume entertainment content. Although we love Netflix shares because of the superior content and technology that drives explosive global growth, there are some headwinding developments this year that could stop this powerful rally in the future.
First, the year will show whether the price increases announced by Netflix in January have been successfully absorbed without affecting subscriber growth. In the largest adjustment to its monthly subscription costs, Netflix prices increased between 13-18%. The cheapest basic plan now costs $ 9 a month, an increase of $ 8, while the cost of the popular HD Standard plan went up to $ 13 from $ 11; and the 4K Premium subscription up to $ 16 from $ 14
This was the fourth time that Netflix has raised prices since its launch, but it was the largest increase. No doubt the timing was great, amid the success of the new content such as & # 39; Bird Box & # 39; and & # 39; Tidying Up With Marie Kondo & # 39; but it is hard to say to what extent the price changes affect subscriber growth
An indication that these price rises will have some impact on growth stemmed from the company's latest forecast for subscribers. After paid memberships increased by 8.84 million in the Netflix proprietary forecast, the company appears to be taking a cautious tone for the current quarter, predicting 8.9 million new customers worldwide, a slight increase over compared to the previous period
Competition just getting underway
Another threat that is just around the corner for Netflix is ​​new competition from some of & # 39; the world's largest media companies. The most direct comes from Walt Disney (NYSE: NYSE 🙂 and AT&T (WarnerMedia from NYSE 🙂 while both companies are preparing to launch their own streaming services later this year.
In our opinion, Disney is the one who has the financial strength, great content and management backing to be the biggest challenge for Netflix. Bob Iger, the CEO of Disney, has made the video streaming service a core part of his growth strategy
He is in the process of restructuring the executive compensation of the company and is willing to sacrifice growth by increasing spending on the new service, which he believes will be loaded with Disney quality brands, such as "Avatar "and" Zootopia. "
It would be naive to take the Disney threat lightly: & # 39; the world's largest entertainment company is a long-term media business winner and has multiple revenue streams to help it survive while claiming the battle with Netflix. The company will soon complete the purchase of 21st Century Fox (NASDAQ 🙂 entertainment assets for $ 71 billion, which it plans to package into its online service.
With the online streaming market becoming overloaded and competition increasing, we believe that the next big challenge for Netflix will be to manage cash burn, which has been a source of concern for many analysts
In 2018, Netflix spent $ 12.04 billion on content development, but these high development costs generated a negative cash flow of $ 2.68 billion. This financial year, the company is likely to show $ 3 billion in cash burn, further raising the level of debt.
As long as the company increases its subscribers, investors have little reason to worry about the company's high spending, but the growing cash-burn will be the only problem that can damage its shares if subscriber growth slows down.
Bottom Line
Netflix is ​​a great company and the stocks are a great bet for investors looking for high growth. With its huge subscriber base, successful content strategy and superior technology, it is difficult not to value Netflix shares. However, we believe it is important to highlight the major risks of this company in 2019 so that investors are not surprised if the trip gets a bit bumpy.
