Shares of Netflix (NASDAQ: NFLX) took a small step back last week, and Jack Hough of Barron's thinks this could be just the beginning. This weekend's Barron's cover story (subscription required) poses that the dot-com darling could lose more than half of its value from here.
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Hough argues that Disney's (NYSE: DIS) recent decision to pull content from Netflix come 2019 and Facebook's (NASDAQ: FB) new niche content-video service join the threat of Amazon.com's (NASDAQ: AMZN) Prime, Netflix's cash-burning ways, and unconventional accounting tactics as catalysts that may trip up the stock.
It doesn't have to be that way. Netflix has made bulls rich by eating naysayers for breakfast. Let's go over some of the reasons the leading premium video service can continue to be a big winner for investors.
1. New and old competition fears are overblown
There's no denying that we live in a world of growing options when it comes to video entertainment. Disney's announcement last week that it was launching an over-the-top ESPN streaming service next year and a broader Disney platform by 2019 sent shockwaves through Netflix shares. Facebook's push for video content is also a big deal, given the social networking giant's global reach. However, will Disney's service be stickier than Amazon's Prime Video? Will Facebook's short-form content squash YouTube? If the answers are that Prime and YouTube are strong enough to survive, then why are we going down this road at all?
Amazon rolled out streaming video content at no additional cost to Prime shoppers six years ago. Netflix had 23.6 million largely domestic subscribers at the time. Netflix's customer base has more than quadrupled in that time. YouTube's been around longer than Netflix streaming, and it hasn't dented the growth. Netflix has been able to grow through that, and while Amazon just began to offer Prime Video worldwide late last year, it's fair to say it should hold up just fine against Disney and Facebook.
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2. Netflix has the flexibility to raise prices
Netflix has been able to raise its prices twice in the U.S. since early 2014, pushing the price of its most popular plan 25% higher without missing a beat. Subscribers keep coming. This summer alone, it has announced price increases in Australia and now Canada.
It's hard to dump a stock that has proved its pricing elasticity. Barron's poses an inane scenario where Netflix would have to grow its global user base by nearly 50% to top 150 million subs and charge $20 a month to justify its current valuation. Arguing that today's highly profitable Netflix would need to generate three times the revenue of its current run rate and a profit several times above where it's at now rings hollow. It seems like the kind of flawed bearish thesis that bears have been making when the stock was a lot lower. A few years ago, it would have been fair to say that even the bulls couldn't fathom Netflix at the 104 million streaming accounts it's servicing right now.
Netflix has the ability to push prices higher. It can diversify its revenue stream.
3. Good luck catching up to Netflix
Barron's points out that Netflix's cash-slurping ways will force it to prop up its debt. It takes Netflix to task for not taking immediate hits on proprietary shows it cancels because it's still counting on them in its streaming catalog. The one thing this bearish argument doesn't touch on is the moat. Netflix has 104 million streaming accounts, and it's growing that tally by millions with every passing quarter.
No one can divide its cost into as many paying customers. Breadth gives it opportunities to control its expenditures. Market dominance makes it a top draw for content creators. Netflix stock isn't cheap, but history has repositioned it as a bargain at once seemingly lofty levels in retrospect. The stock will correct, just as the market inevitably will. Betting against Netflix is the dangerous path to take.
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