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Netflix's 'House Of Cards' Is Crumbling
August 10, 2018 12:00 pm|Comments (0)

Several weeks ago Netflix (NFLX) plummeted in the wake of Q2 2018 earnings that showed positive subscriber growth and historic earnings but not at the levels Wall Street had expected.

Since then the stock has not recovered but rather slumped further, as a mix of bad Netflix Originals, increased hype and possibilities for Disney’s content streaming service as it continues to pull content from Netflix, and sudden competition from Roku (ROKU) and even Walmart (WMT) making it clear Netflix’s days as the only game really in town are over.

Netflix’s P/E ratio has shrunk enormously from its days of being over 200 and now sits at roughly 147, a historic low compared to recent years, as its stock price has remained slumped amid all of this past month’s announcements.

Chart NFLX data by YCharts

As Netflix moves forward I believe the risks I’ve talked this past year about are starting to now fully materialize and the stock is going to face immense pressure from rapidly increasing competitors in the market, price pressure for subscriptions that seems downward rather than upward as it had hoped, and a content drought that is already causing worries for the company.

Even if Netflix is able to continue to grow revenue and subscribers, its P/E valuation will undoubtedly remain lower than its 200+ days as past hyped growth expectations simply are unreasonable. The question of how fast it can grow its earnings, if at all, compared to how fast its growth multiple shrinks as the content streaming market matures means that its investors may be in for days very different from past years.

Problem #1: Downward Price Pressure Derails Original Revenue Plan

For several years the content streaming market was really just Netflix, Amazon Prime (AMZN), and Hulu (FOXA). Under this market Netflix thrived, as many production companies flocked to Netflix, given its wide subscriber base, and seemingly all was well in the content creation and distribution pipeline. Netflix subscribers grew seemingly without end as the company’s stock rocketed up and its P/E valuation did too.

However even right now, in Summer 2018, the content streaming market is very different. Facebook Watch (FB) and YouTube Red (GOOGL) are gaining ground. Roku Channel, which launched last year and is based on ads (being called “free” by many) rather than subscriptions for its various movies and shows, is seeing immense interest after positive earnings and activity results.

Walmart, of all surprises, announced this month it is joining the fray as well by appealing to a “Middle America” market that it believes it knows and has a strong reputation with. Undoubtedly that may take a chunk out of Netflix’s U.S. base, or at least put pressure on Netflix to better justify its appeal to that market.

Furthermore, with Disney’s (DIS) acquisition of 21st Century Fox settled after Comcast’s (CMCSA) potential wrench in the machine earlier this summer we see what could be a huge content powerhouse once its streaming service is released and what combinations it may make with Disney’s soon-to-be asset Hulu.

Beyond that, subscriptions seem all the craze now as everything from ESPN+ gains ground to news services like Fox Nation, MSNBC’s upcoming subscription streaming service, and more.

The reasons this matters for Netflix are that it contradicts several long-standing assumptions that supported Netflix’s current growth trajectory to this point, specifically and importantly that Netflix always had pricing power up rather than down.

A major hope for Netflix’s future earnings and revenue was that it would be able to raise prices more for the core bulk of its users, which each $ 1 a month price jump equaling an increase in revenue of perhaps almost 10% and then bringing in real earnings as well.

However every sign seems to be pointing to a lower price point as the market basis for subscription prices. With consumers seemingly willing to utilize multiple subscription services to acquire their particular content needs, all-in-one services like Netflix are seeming misplaced as companies like Disney say they will price their service low, Walmart similar, and Roku even just shifting the model entirely to an ad-based one that gives Netflix-like content for free.

Problem #2: The Content Drought Begins For Netflix

The second major issue now facing Netflix is that it was always assumed Netflix would be a content king, whether because entertainment production giants would see them as the key distributor or because Netflix Originals would continue to be highly successful brands on their own.

However the latest Netflix Originals flop, “Insatiable,” is less of a surprise due to long-standing criticism of the bulk of Netflix Originals with praise for just a few, but now is a more prominent symptom of Netflix’s content crisis. In entertainment, brands are powerful and the intellectual property rights often command more money than any amount of actual production or distribution costs themselves.

Netflix for a long time benefited off of the immense variety of brands that found their home on it and the willingness of old and new brands to seek Netflix partnerships and funding. However this has changed, as Disney’s content powerhouse of brands is pulling completely away from the platform and major shows are turning down Netflix as offers from other platforms are more appealing, either in terms of money or in terms of building up the brand.

This puts Netflix in a difficult position, as it means it needs to either raise again already-immense and rising content costs or somehow find some kind of new series or “content universe” that is a hit with the public. The former is a crunch on Netflix’s originally optimistic dreams and the latter is extraordinarily difficult.

Conclusion

Netflix has blown past assumptions before but it is clear the market of mid-2018 is already vastly different from that of 2017, 2016, or prior, as now serious and targeted content streamers are clawing growth and maybe even eventually Netflix’s current base from the company.

As the content streaming market seemingly hits a far more mature level in 2019 with the entrance of Disney, Walmart, and more, Netflix will find itself needing to justify itself as one of the subscriptions people are willing to have. At the same time it will face downward price pressure combined with potentially increased content costs, leading to the original growth trajectory expected for the company to be derailed even further.

Even if the company continues to grow its revenues and earnings, even at a slower pace, rather than receding, the days of a 200+ P/E multiple are undoubtedly long over and the stock price seems to be beginning to now reflect that reality.

(Source: Complex)

Disclosure: I am/we are long FDN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Posted in: Cloud Computing|Tags: , , ,
10 Charts That Will Change Your Perspective Of NetFlix's Massive Success In The Cloud
July 12, 2018 6:46 pm|Comments (0)

Netflix standardizing on a proven cloud platform and collaborating with Amazon Web Services development teams on machine-learning security initiatives and many others is proving to be a powerful catalyst fueling the subscription services’ global growth.   Photographer: Chris Ratcliffe/Bloomberg

Netflix’s exponential growth this year is attributable in part to the cloud platform decisions made years ago that enable their subscription-based business model to scale globally securely. Last year at Amazon’s AWS re:Invent 2017 Conference,  Greg Peters, Chief Product Officer of Netflix provided insights into how closely Netflix and AWS work together to create innovative new services based on AWS’ advances in machine learning-powered security, developer apps, and scalability. It’s an insightful session into how Netflix is relying on Amazon to do the heavy lifting of infrastructure development and can be viewed here, AWS re:Invent 2017 – Fireside Chat: Steve Schmidt, Jenny Brinkley, and Greg Peters of Netflix.

AWS and Netflix development teams are using machine learning-powered security to analyze data access patterns and look for anomalous account activity. The discussion includes many of the foundational concepts of Next-Gen Access (NGA) that is foundational to attaining Zero Trust Security (ZTS) across an enterprises’ IT infrastructure. AWS and Netflix are looking at how to capture the myriad of data points each access point to their subscription service enables daily and assess the risk of a breach in real-time, much like what Centrify is doing today. Greg Peters also defines scale as the ability to accommodate a growing, diverse base of developers with a paved path network that enables them to create and innovate quickly. Netflix has a strong DevOps culture where engineers have the freedom to spin up a new AWS instance to try out new ideas in seconds without having to wait for IT to approve them.

The following are ten charts that illustrate Netflix’s rapid growth as a cloud-based subscription business:

  • 27% of Americans prefer Netflix over any other platform, including basic cable and broadcast TV according to a recent survey by investment banking firm Cowen & Company. Netflix’ popularity is soaring with Americans in the 18 – 34 age group with 39.7% naming Netflix as their favorite TV platform. The following illustrates just how dominant Netflix has become the TV platform of choice. Scaling to this level of popularity is possible in part because of the decision to standardize on a single cloud platform and work to have Netflix-specific features including on the AWS roadmap. Source: Netflix Is Americans’ Platform of Choice for TV Content, Statista, July 5, 2018.

Source: Netflix Is Americans’ Platform of Choice for TV Content, Statista, July 5, 2018.

  • Netflix’s latest quarterly revenue of $ 3.7B is evenly distributed between domestic and international streaming, earned from 118.9M global subscribers as of March 31rst of this year. Q1 2018 revenue is evenly distributed between Domestic Streaming (49%) and International (49%). David Goldstein’s excellent graphic below provides a succinct analysis of the Netflix Income Statement for Q1, 2018 and a profile of subscriber levels over time. Source: Netflix Strong Q1 for Revenues, Profits, and Members by David Goldstein on April 19, 2018. Mekko Graphics.

Source: Netflix Strong Q1 for Revenues, Profits, and Members by David Goldstein on April 19, 2018. Mekko Graphics.

  • Netflix dominates the U.S. video-on-demand (VoD) market with 77% of all VoD services subscribers. With a 21% lead on Amazon, Netflix has market momentum in the U.S. where the strategy of creating more original content is paying off with subscriber growth and a greater variety of content density than their many competitors. Source: Statista Global Consumer Survey, 2018

Source: Statista Global Consumer Survey, 2018

  • 43% of all U.S. VoD users subscribe to both Netflix and Amazon Video. Subscribing to multiple services is common with U.S. VoD users with 83% subscribing to more than one service. Nearly 1 in 3 U.S. VoD subscribers (29%) are subscribing to five or more services. While so many subscription-based businesses struggle to gain customers and minimize churn, Netflix has devised an aggressive strategy of making their subscription, ad-free model succeed. Reed Hastings, CEO, credits the intensity of effort and focus they are putting on creating exceptional, high-value content that attracts new subscribers and makes them loyal. A video clip of a recent interview with him and other members of the senior management team is here. Source: Statista Global Consumer Survey, 2018

Source: Statista Global Consumer Survey, 2018

  • Netflix is projected to have over 114M households subscribing online by 2020. Netflix is growing its global household subscriber based at 8.96% Compound Annual Growth Rate (CAGR), increasing from 81.52M households in 2016 to over 114M in 2020. Localized Netflix-produced content globally is growing faster than senior management originally anticipated, with 3%, a Brazilian science fiction (sci-fi) series produced in Portuguese being an example of one of the original content projects doing exceptionally well in 2018. Sources: Netflix Investor Relations and Digital TV Research.

Sources: Netflix Investor Relations and Digital TV Research.

  • The Asia-Pacific subscriber base is projected to grow at an 18.47% CAGR through 2023, making it the fastest growing region globally. Western Europe is also forecast to gain subscribers, increasing by16 million between 2018 and 2023. Latin America, where Netflix is enjoying success with originally produced content that is being well-received globally, is predicted to gain 8 million subscribers in five years. Sources: Netflix Investor Relations and Digital TV Research.

Sources: Netflix Investor Relations and Digital TV Research.

  • By 2020 Netflix’s streaming business in the U.S. alone is projected to deliver over $ 7B in revenue. From 2018 to 2020, streaming revenues are projected to grow at a CAGR of 8%, jumping from $ 5.4B in 2017 to $ 7.2B in 2020. Between 2011 and 2014, Netflix more than doubled streaming revenues from U.S.-based subscribers jumping from $ 1.6B to $ 3.4B. Sources: Digital TV Research, Netflix Investor Relations, and Nakono.

Sources: Digital TV Research, Netflix Investor Relations, and Nakono.

  • While price is the most appealing feature for 56% of respondents to recent Tivo/Fiercecable survey, members having the flexibility of creating their profiles (52.9%) increases content consumption across all devices. Speaking from experience in a household where there are five separate Netflix accounts, each person having the opportunity to personalize their content preferences is a major advantage of NetFlix over other streaming services. Search is the third favorite feature and autoplay fourth with 43.4% of respondents selecting this feature. Multiple responses were allowed to this question. Source: TiVo & Fiercecable study completed December 2017

Source: TiVo & Fiercecable study completed December 2017

  • Netflix’ content strategy is paying off with strong levels of loyalty across all age groups, including the 50 – 64-year-old segment who often perceive TV as long-standing broadcast ad-based networks. Netflix’s cloud strategy has made it possible to immediately scale their original content across national and regional markets immediately, as is the case with their sci-fi series 3% which is produced in Portuguese for the Brazilian market. Netflix’ senior management has found a strong reception for 3% across other nations as well. Their cloud platform makes it possible to scale this and other series globally in real-time, outrunning competitors who have not invested so heavily into a scalable, secure cloud platform. Source: TiVo & Fiercecable study completed December 2017

Source: TiVo & Fiercecable study completed December 2017

Source: Netflix’s International Expansion Picks up Steam by Martin Armstrong, Statista. April 17, 2018.

Louis Columbus is an enterprise software strategist with expertise in analytics, cloud computing, CPQ, Customer Relationship Management (CRM), e-commerce and Enterprise Resource Planning (ERP).

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Posted in: Cloud Computing|Tags: , , , , , ,