For the past decade, Netflix (NASDAQ:NFLX) has been subject to a deluge of criticism and skepticism. It does not make a profit. Bigger companies will get into streaming and destroy it. The end of Net Neutrality will. It won’t succeed in producing appealing original content.
At some point, we have to accept that we were wrong and Netflix’s strategy is right. The company threw down a slam dunk in its 2017 fourth quarter earnings report, as CNN reported that it added 8.3 million new subscribers and blew out its expectations of 6.3 million. In addition, it added 1.98 million new subscribers in the United States compared to expectations of 1.25 million, and now has a total of 118 million subscribers. And this growth came despite raising prices last year.
Netflix’s stock jumped over 10 percent and closed at over $261 at the end of trading on Wednesday, and the stock reached a $100 billion market cap for the first time. And while there will be those who want to zag when investors zig, there is no point in being contrarian just to be different. Netflix may have some small concerns, but this earnings report is undoubtedly a major victory and investors should consider hopping aboard this bandwagon.
The Importance of Subscriber Growth
Netflix bears can point to certain metrics in this earnings report to justify their skepticism. Netflix has consistently had negative cash flow since 2014, and it will continue to need to burn through cash to fund its great original content.
Netflix will spend up to $8 billion for programming in 2018, along with an additional $2 billion for marketing and $1.3 billion on technology and development. By comparison, Netflix’s revenue was $3.3 billion in the last quarter and $11.7 billion overall. If Netflix plans to spend this much, skeptics may say, when are they going to finally turn around and become profitable?
It probably will not be for a while, but just look at Amazon (NASDAQ:AMZN) to show that a company can be successful for years while just focusing on growth. And while every half-baked tech company wants to make that comparison to justify their lack of profitability, it remains valid in Netflix’s case.
Despite Netflix raising prices, the company has continued to add subscribers and still has room to grow even in the United States. In the company’s earnings call on Monday, CEO Reed Hastings noted that Netflix five years ago had forecast that the U.S. market would be somewhere between 60 to 90 million customers, and Netflix is still only at 55 million. Netflix’s leadership talked about marketing towards older viewers, and of course Netflix has incredible expansion opportunities overseas, particularly in Latin America and Asia.
Standing up to Competition
Netflix has not made the move towards emphasizing original content just to offer something new to consumers. It made this decision because it correctly predicted that eventually, companies like Disney will attempt to branch out and offer their own streaming services.
Some analysts have predicted that Disney will swamp Netflix out by offering their own exclusives, and there is no denying that by making Marvel, Star Wars, and Pixel movies exclusive to their own streaming service, Disney would be a formal competitor. Furthermore, as Disney is actually profitable unlike Netflix, perhaps Disney or other streaming services could undercut Netflix.
That may be a concern over the very long term, but Hastings observed that he does not view a Disney (NYSE:DIS) streaming service as a threat and for good reason. First, Netflix will still have access to properties like Marvel for a long time as these contracts are signed years in advance. Second, Netflix can continue to strike deals with producers and directors as opposed to studios to get quality content.
The nightmare scenario of major studios locking Netflix Inc (NASDAQ:NFLX) out of deals is unlikely as long as Netflix is willing to pay, and competition with Amazon, Disney, and other streamers does not have to be destructive. Each side can learn from the other and figures out what works the best – and as the premier streaming service on the Internet, Netflix is in the best position to adapt.
Get a Subscription
From one perspective, the best indicator of Netflix’s ability to succeed is not its cash flow, profits, or even its growing number of subscribers. It is its ability to put out great content at a reasonable price. As long as Netflix can continue to turn out great, original shows like The Crown, Stranger Things, or even Bright (which has been popular with consumers even while critics trashed it), it will continue to grow. And as long as it continues to grow, it can find people willing to service its debt, and not have to be concerned about its negative cash flow.
Netflix could be hampered in the future by competition from large companies, but that is a long-term concern if that and it has earned the benefit of the doubt by now. If you have put off on investing in Netflix, put off no longer.