January 2, 2016    4 minute read

Netflix and Climb

   January 2, 2016    4 minute read

Netflix and Climb

Over the years, we have witnessed many of the greatest rivalries, from McDonald’s and Burger King, JP Morgan and Goldman Sachs, and even Ronaldo and Messi. With the rapid rise of online streaming services, a new feud amongst giants has manifested.

2015 proved to be a dismal year in the US equity market, with the S&P 500 and the Dow Jones Industrial Average falling roughly 1.3% and 1.5% respectively. Amid the abysmal year, there stood two gallant performers, both battling head-to-head for online subscriptions; Amazon and Netflix. Amongst the constituents of S&P, only Netflix and Amazon managed to double their share price in the calendar year. But can Netflix deliver a knock-out blow in 2016 and will its remarkable momentum continue?

Netflix Inc. (NFLX)

Netflix share price in 2015

It’s no secret that customer behaviour has been shifting for some time, as individuals preferring the comfort and convenience of online video streaming, triggering the fall of large video rental shops such as Blockbuster. The rise in more movie and TV streaming services epitomises the change to an online rental market. No-one has benefited more than Netflix and over the course of a year, they’ve seen a rapid influx of new online subscribers. Their business model is simple; you pay a fix monthly fee and gets access to thousands of TV and movie titles. What differentiates Netflix from other streaming services is they offer award-winning original content. Netflix have been churning out a growing collection of original TV series including Orange Is the New Black and House of Cards which have gathered numerous accolades.  The on-line giant has announced plans to invest at least $5 billion in original content next year. This has all equated to consistent growth in revenues which rose 23% in 2015.

“The spectacular shift to on-demand consumption is best described as ‘consumers evolving vs. old habits’ rather than ‘Netflix vs. traditional media’. We’re all racing to fulfill consumer desires.”

Netflix Q315 Letter to Shareholders

Consequently, Netflix has seen its shares hit a record high, climbing to $132 an ascent of 160% in less than a year. Analysts, though, are divided in opinion on where the share price is heading. At its current price, the company has an inflated price to earnings (P/E) ratio of 312.86 and price/earnings to growth ratio of 29.9. Contrast this to Apple, which has the P/E ratio of 11.75, demonstrates Netflix’s ballooned share price, which is likely to repel more conservative, value-investors. This unprecedented growth has led to many believing the security is over-valued and the common consensus amongst analysts is that this disconcerting growth coupled with large operating expenses are a major concern to investors.

There are, however, a group of bullish forecasters who predict the current trend will continue into 2016. RBC analyst, Mark Mahaney, forecasts a continued rise and offers reason for investing in the equity.

“We think they are going to add more subs(criptions) in the U.S. this year than last year, despite the price increase…You want to be long (buy) Netflix. It’s one of the most disruptive companies in the Internet space, and the valuation is still reasonable.” 

Mark Mahaney, RBC Capital Markets Investment Analyst

Netflix have continually defied critics and with a commitment to delivering award-winning shows and establishing international growth, it’s no wonder some buoyant individuals predict the share price to exceed $200.

Netflix and Amazon Prime will continue to slug it out in 2016. Amazon Prime offers similar services to Netflix but the online streaming acts as a peripheral function of its massive company. For Netflix however, online streaming is its chief business, which puts more pressure on the streaming giant to consistently create popular original content and offer innovative streaming features in order to fend off competition. Netflix have also encountered difficulties in establishing global growth and are facing difficulties in attaining international licensing content. According to Chief Content Officer, Ted Sarandos, obtaining movie licenses ‘has not been an easy road’ and continues to say that they have experienced ‘some resistance’. This is not good news for Netflix speculators as it is believed the rise in international streaming members will counteract its weakening domestic growth.

All-in-all one would be naïve to expect another 100% return in 2016, particularly with the multitude of challenges Netflix will encounter internationally and domestically. But for some optimistic investors, the potential benefits far outweigh the risks. Netflix are on the verge of becoming a global superpower and therefore, you would be a fool not to seriously consider investing in Netflix.

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