The video streaming giant Netflix Inc. (NASDAQ 🙂 has had a rather unusually boring year. His shares have not done anything for investors in the last 12 months, which causes concern that the producer of some of the most popular shows has seen the best in the current growth cycle.
Trading at $ 380.55 at the end of Friday, Netflix shares have fallen by more than 9% in the last 12 months after reaching a record high of $ 423.19 in June 2018. In the previous decade, the company that has evolved from A video rental rental company delivered unimaginable returns for investors. His stock increased around 6,000% over a 10-year period.
It is not unusual for high-flying technology companies to lose their momentum and no longer show that growth markets have already been priced in, often resulting in short bearish spells. For Netflix, however, the current weakness is more pronounced due to the rapidly changing competitive landscape. These are the three biggest threats that, in our opinion, keep the shares of Netflix under pressure:
1. Competition is coming
The competition for Netflix is ​​definitely warming up and the company is starting to feel the pinch. In our opinion, the biggest challenge comes from the global entertainment giant Walt Disney Company (NYSE :), which builds a war chest and arms itself against rivals in the video streaming market following a continuing downward trend in the cable sector. .
Disney announced in April that Netflix will compete with its Disney + app, launched in the United States on November 12, for $ 6.99 per month, half the price of Netflix. It offers programming from Disney & # 39; s largest franchises, such as Star Wars and Marvel Studios, in addition to new, original programming. The service probably has between 60 million and 90 million subscribers by the end of the 2024 financial year.
Disney said it will surrender about $ 150 million in business revenue this year after cutting licenses to competing services, such as Netflix. "Captain Marvel," the superhero blockbuster, is the first Disney movie in years that will ultimately not be seen on Netflix.
Last week, NBCUniversal announced that it plans to take the popular sitcom "The Office" from Netflix and will broadcast it on its own online platform from 2021 onwards. The Office is the number 1 streamed show on Netflix and has accounted for more than 52 billion minutes of watching last year, according to NBCUniversal, a part of Comcast Corp (NASDAQ :).
Apple Inc.
(NASDAQ 🙂 and Amazon (NASDAQ 🙂 also have big plans to capture most of the streaming cake. In March, Apple unveiled an original content service called Apple TV +, an updated TV app, and an Apple TV channel service for tapping external providers, including HBO, Showtime, and Starz.
2. Intensifying Cash Burn
All this new competition means that Netflix has to spend more to make original programming and to bring that content more aggressively to the market to keep following new subscribers who will soon be bombarded with new offers and attractions
Last year, Netflix spent more than $ 12 billion to buy, license, and produce content. This year, this figure is expected to reach $ 15 billion, while the company spends $ 2.9 billion more on marketing. These costs are because Netflix is ​​expected to report $ 20.2 billion in revenue in 2019, according to analysts from Refinitiv.
Since mid-2014, Netflix has been negative in cash flow, a continuing concern for stock bears who think that Netflix is ​​not even close to cash flow positive – and that reality will soon be chasing its bulls.
"There are competitors with deep pockets who are going to hire the same producers and create convincing content. That's why they don't have a canal like an Amazon. They don't have a canal like a Google (NASDAQ :)," short-seller Andrew Left, who with has successfully gambled against stocks such as Valeant Pharmaceuticals (NYSE :), said on a CNBC program.
3. Plateauing growth in home markets
The other big challenge for the streaming service is how to stimulate growth when investors become impatient to see profitability.
After raising prices in some of its largest areas this year, Netflix predicts that it will only add 5 million new customers by the end of June 30, far behind Wall Street forecasts for 6.09 million. The company blamed the delay for part of its more expensive offer.
While price increases could help improve Netflix's net sales, they come at a time when streaming competitors are preparing to make the market more competitive. And what if the growth of subscribers in the most lucrative market, North America, continues to slow down and the company burns more cash every year to cover the costs of success? Investors would find it hard to ignore such a mix, and the company's stock price would sooner or later reflect that reality.
Short overview
The journey of Netflix shares has been largely unimpeded in the last decade. But with increasing competition, rising costs and saturation in the domestic market, it will be increasingly difficult for the streaming giant to repeat that performance. The company's quarterly profit, which is expected to be released on July 17, provides a better understanding of these potential risks.
