Netflix Q4 2016

 

Netflix does not have a legacy (product) to protect like other established media providers do.  They don’t need to engage ratings or focus groups for content and have gotten away with little transparency around content.

It is an evitable secular trend that consumers shift to online content.  As few barriers to entry technologically, Netflix has faced steepening competition from Amazon, Hulu, Sling TV, and potentially, Apple.  The big players can afford to compete and can outlast slow business due to huge cash reserves.

As more revenue will be derived from, and generating higher quality original content, Netflix looks to increase original content to 50% of content offered, dropping off lower tiered and less quality content.  Q3 results blew away all expectations and guidance.  The company credited the beats to new original content, specifically second season of “Narcos” and “Stranger Things.”  A forward P/E over 100 and a near 20% stock price jump amid earnings beat suggest that 15-20% operating margin and successful initiatives have been priced in.

The jury is still out whether the scale of the business will allow the company to spread the fixed cost in price hikes across old and new subscriber bases.   The big picture is that the business model is not evolving and subscriber additions have been unpredictable.  Netflix’s dominant position, coupled with expensive valuation, becomes a curse of no chance of takeover.

The company approaches threshold for price hikes which have been 10-15% at a time, causing slower new subscriber growth and old subscribers leaving.   Though, previous price hikes have not caused sustainable damages on both revenue and stock prices.

Eyes will be on international growth from here on out, 200M potential intl subscribers, 85M current intl subscribers.  The next goal is to infiltrate China by licensing content to local providers.  It is not necessarily a smooth sailing, after Disney’s Alibaba collaboration and Apple’s movie service have failed in China. Chinese regulatory environment is not friendly either.  Additional challenges include producing content in local languages and rising licensing costs especially internationally.

 

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