Netflix (NASDAQ: NFLX) has successfully disrupted the television business. The streaming leader not only made a new technology viable, it also created the first service that made cord-cutting viable.
Before Netflix, cable essentially had a monopoly. Dropping the service meant relying on an old-school-style HD antenna, not-very-good internet content providers, and other subpar choices.
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That changed when Netflix entered the market, first by showing older television shows and movies, then by creating original content. That has been a stunningly successful model, but it's also an expensive one -- and one where the competition has picked up.
|Netflix total subscribers at year end||44 million||57.4 million||75 million||93.8 million||117.6 million|
The case for Netflix
The streaming leader dominates the market and has shown no signs of slowing down. In its most recent quarter, the company added 6 million subscribers -- about 1.5 million in the United States and roughly 4.5 million in the rest of the world.
It also saw revenue grow by 32%, completing a year in which revenue climbed by at least 30% every quarter. In addition, fourth-quarter diluted earnings per share came in at $0.41, the company's best performance of the year.
"We had a beautiful Q4, completing a great year as internet TV expands globally," CEO Reed Hastings said in the Q4 letter to shareholders. "In 2017, we grew streaming revenue 36% to over $11 billion, added 24 million new memberships (compared to 19 million in 2016), achieved for the first time a full-year positive international contribution profit, and more than doubled global operating income."
The case against Netflix
Serving a global customer base is expensive. Netflix plans to spend between $7.5 billion and $8 billion on content in 2018, an increase from $6 billion in 2017. That's a bigger increase than in previous years, when content spending rose by about $1 billion a year.
There are multiple reasons for that. Netflix has expanded around the world and needs localized content for its biggest global markets. The company plans 30 original international series in 2018.
The biggest reason Netflix is upping its spending, however, may be that Walt Disney (NYSE: DIS) plans to enter the streaming market in 2018. The Mouse House may be the only company that can truly challenge the streaming leader because it can create original series based on its intellectual property library.
That's a powerful roster including Star Wars, Pixar, Marvel, Disney's animated classics and more-recent animated hits. Disney also has an impressive lineup of archival content from its ABC network, various cable channels, and decades producing movies.
Netflix is still a buy
Disney will have a compelling offering, especially for families with young children, an area where Netflix may be at its weakest. The entrance of a new player, however, probably will not hurt Netflix. Instead, it will give more people valid reasons to cut the cord.
Even if a consumer subscribes to Disney's as-yet-unpriced service, along with Netflix, Hulu, and even one more, the total cost should remain well below what the average household pays for cable. Disney's service will grow the market and should lead to Netflix getting bigger.
The spending issue is a short-term problem. Eventually, Netflix will have an impressive archive in all its key markets. That may take another decade, but to a new subscriber, it does not matter what year Daredevil or Stranger Things premiered. The same is equally true of the latest Adam Sandler movie and most comedy specials.
Eventually, Netflix's content spend will stabilize and maybe even come down a little. Until that happens, the company's steady growth and strong archive of owned originals make it a clear buy.