Netflix Stock Is Still King of the Streaming Industry
What Is Netflix’s Streaming Service Value Proposition?
Due to stringent Covid-19 measures in effect, more people are turning to binge-watching to escape from reality. Netflix is the company most slated to benefit from this social shift within its space, given that it can leverage its millions of subscribers across the world to grow its margins. The firm has dominated the streaming industry over the years by focusing on producing unique content that has drawn more user engagement. Additionally, it has resulted in a higher per membership viewing than its competitors Amazon, Hulu, and the new boys in the block Disney+.
Netflix has seen strong growth in its bottom-line driven specifically by its unique content prioritization strategy. It has released several hit shows, for example, Ozark, Squid Game, and Tinder Swindler. The firm also uses a business model that pays for its content at a fixed price. This means all the licensed and self-produced content costs the company a specific dollar amount regardless of subscribers. This cost structure significantly lowers marginal costs (cost for each additional subscriber) and makes it profitable.
Their ability to scale from the large subscriber base has given them the leeway to take up far riskier projects and spend more money to expand their services. A good example is a large investment Netflix spent to release the Award-winning movie A Marriage Story. This has been crucial in driving their growth in revenue.
Netflix is one of the best stock recommendations in the streaming space. The firm is likely to maintain the difference between content costs and revenue per user, which will drive the operating margins much higher.
When assessing the value of Netflix, it’s helpful to also analyze its flaws in a cost-benefit analysis. The bear thesis from investors for the stock has been their cash burn rate as the firm piles up heaps of expenses to create more original content. This has caused issues with the free cash flow available to the company to meet short-term obligations. As valid as this concern is, the strong growth in their topline allows them to offset this issue. Management also expressed a positive outlook in the most recent earnings report stating that the firm has peaked in its annual Free Cash Flow deficit.
Increased competition, particularly internationally, has also been an Achilles heel that the company has struggled with over the years. However, the company has responded exceptionally well by expanding and diversifying its content to appeal to different demographics. This consists of black television series such as Dear White People, and the hit teen romantic comedy, All the Boys I’ve Loved Before. Additionally, the streaming service has produced films featuring minority leads from the LGBTQ community. This strategy’s success has been reflected in the strength of its international foothold, drawing more subscribers.
Due to these recent developments, Netflix’s fair value is not fully captured in its current share price. The valuation gap exists as the market factors in their operating margin and shift in dynamics that resulted from the pandemic. If the economy fully opens back up in the near term, the lack of appeal to go to movie theaters due to limits on public gatherings solidifies the demand for the streaming service.
Currently, several investment banks have an overweight rating on the stock. An overweight rating means the analyst believes it’s undervalued and predicts it will rise once all the fundamentals are priced in. According to Bloomberg data, the enterprise value to earnings before interest, tax, and depreciation (Wall Street’s valuation metric) is twice as big as its closest competitor Disney plus.