Investment Analysis of Netflix

Investment case

Nowadays, the stock market exchange is filled with uncertainty and a lot of risk. It is a considered as an risky environment for people investing their money without security and desirable features. However, each security with high risk comes with a relative high return. As a result, investors can take advantage of this situation for the purpose of earn a significant amount of money. In order to accomplish that goal, investors have to eliminate the risk. Specifically, it is needed to make a case study for the stock that they are going to invest their money. In the past 20 years, companies that operate in the technological section have grown significantly and have seen their stock price rocketed up, i.e. Facebook. In the last five years, a firm has a constant upward trend and it forecasted that it will keep growing. Specifically, Netflix, Inc. is a renowned company that operates an online streaming service company, which offers movies and television shows over the Internet. The company grows its earnings via monthly membership fees for its streaming services. It was originally operating in the United States of America, but recently, it has become a global phenomenon.

Additionally, Netflix surpassed anticipations for accumulating more subscribers during the third quarter, recording robust user growth in global markets as it invests constantly vast amounts of money in its international programming offerings. Also, the forecast for the fourth quarter is quite optimistic; 9.4 million additional subscribers which is increased by 13% compared to the previous year fourth quarter.

Television shows of online services have significantly rose the last couple of years compared to traditional services, such as broadcast and cable services, since the average price of production is considerably less for online streaming.

Nowadays, new seasons of famous series and movies are released until the end of 2018 and as a result, its stock price may be pushed upwards.

Netflix is traded in the Nasdaq stock market which operates in United States of America.

It should be considered that data sample is obtained during the period 14/11/2007 until 15/11/2018. It is firmly believed that Netflix company is considered as an opportunity for investing because right now the stock is underperforming but with a huge prospect. Specifically, the current stock price is 270.6 USD and dropped by 2.61% when the market closed yesterday. Here is briefly the main information regarding the current capitalization of the stock of Netflix US equity.

However, it is needed to take into account a fundamental analysis as well as a risk analysis in order to understand if the stock is worth investing or will end up with an undesirable outcome.

1.https://www.wsj.com/articles/netflix-reports-strong-growth-in-new-users-1539720594

2. https://quotes.wsj.com/NFLX/company-people

3. Bloomberg terminal report

4. JP

5. https://www.statista.com/chart/10311/netflix-subscriptions-usa-international/

Sector

US economy

To begin with, we should examine the current position of the United States’ economy as well as how the sector of Communication Services sector performs. The economy of the United States of America increases the gap between itself and the rest of the globe in terms of annual growth. To underpin the previously mentioned, the economy of the latter declines compared to U.S.A’s which continues to ascent. Actually, it is expected to grow constantly over the next few years, beating the rest of the world. As far as the dollar is concerned, it remains buoyant in contradiction of most main currencies. The unemployment rate in November of 2018 slugged at 3.9%; all-time lowest in the United States of America which are of course perfect news for the country’s economy. However, as a result of the low employment, inflation has increased to 2.5%. Since the mid-terms in November of 2018, the bond market has showed uncertainty for the future values of growth and inflation. Finally, the interest rates in U.S., which are at the rock-bottom level since the financial crisis in 2008, are beginning to climb and it is firmly believed that they will not return to pre-crisis levels; at least, at the foreseeable future.

https://ig.ft.com/sites/numbers/economies/us/ 

https://www.cnbc.com/2018/10/16/us-economic-outlook-vs-the-rest-of-the-globe-is-brighter-than-its-been-in-11-years.html

COMMUNICATION SECTOR

As part of the largest-ever overhaul of Wall Street’s wide commercial sector, the communication sector debuted in September of 2018. The new subdivision suggests how the technology, media and consumer industries have progressed. The new S&P 500 sector includes recognized companies such as Facebook, Alphabet, Netflix etc. The new communications sector accumulates for around 11% of the entire S&P 500, while the previous telecom sector was roughly 2 percent. It is confidently understood that the new communication sector will produce higher growth for the companies included compared to their time in their previous sector. As it is stated before, Netflix stock price is underperforming at the moment because of the entire downward trend in the global market. However, over the last year, the sector comprises of an ascending trend and investors can take advantage of the situation; the share price is significantly low at the moment and they are capable of earning a considerable amount of money in the future. We can notice that Netflix stock overperforms compared to the rest companies of the sector. Specifically, the former performs at +0.31%, while the latter accounts for -0.53%.

15.11.18

COMPETITORS

Netflix’s major competitors in the United States of America in this sector is Comcast as well as Disney. Comcast is a well-known broadcasting and cable television operating in the United States of America while Disney is an American diversified international media colossus. Recently, the former launched a new stream service called Xfinity while the latter has announced that it is developing a new streaming service, Disney+, which outcome is always unpredictable. However, Xfinity has not been considered yet as a top service. Over the past few months both of them were actually distracted by an extended bidding war between them in order to acquire the main assets of 21^st Century Fox. Disney eventually won and hence, it added major amount of debt and months of integration disruptions. As we can see in the graph below, Netflix outperforms both Disney and Comcast as well as the entire NASDAQ. Each of the companies provide positive returns, but Netflix, on average, surpassed them by 35% in the last year. We will get into more details in the next section which is the fundamental analysis.

https://uk.reuters.com/article/usa-stocks-gics/a-close-up-of-wall-sts-new-sp-500-communication-services-sector-idUKL2N1W61WT

https://www.forbes.com/sites/dbloom/2018/05/26/netflix-disney-comcast-market-capitalization-valuation/

Telecommunication sector

https://markets.ft.com/data/sectors/Telecommunications

https://www.bloomberg.com/markets/sectors/communication-services?in_source=marketdata-quote Sector graph

Fundamental Analysis

Fundamental Analysis establishes the health and performance of an underlying firm by looking crucial numbers and economic indicators. Specifically, they are reports that helps investors understand the firm’s financial history and activities and hence, learn about the current financial position of the company and its probable future returns and related risk. To underpin the previously mentioned, the balance sheet, the income statement and other information given for the stock provide the useful information.

BALANCE SHEET

Balance sheet provides us information about the firm’s financial position on a given date. It offers us significant data of the total assets, liabilities and equity. As far as Netflix is concerned, the last available official balance sheet published by the firm is for September of 2018. Netflix’s current assets comprise for $8,729,981,000 and its total assets account for $23,366,229,000. Furthermore, its current liabilities are $6,298,240,000 and its total liabilities are $18,356,576,000. However, we can describe and evaluate how the balance variated for the last 10 years in the next given table.

As we can see, the total assets and liabilities have constantly grown, reaching 19,012.7 million dollars and 15,430.8 million dollars respectively.

INCOME STATEMENT

Income statement summarizes the company’s revenues and expenses over an accounting period. It includes information such as income before income taxes, provision for income taxes as well as net income and earnings per share. The last available official income statement published by Netflix is until September of 2018, when 9 months have ended. Revenues were $14.98 billion, growing quarterly 34%. Also, net income and earnings per share accounted for $1,077,208,000 and 2.48 respectively. However, Bloomberg terminal has provided us with information regarding the performance regarding revenues, net income and EPS for the last decade and the estimation values for years 2019 and 2020 as well as the end of the fourth quarter of 2018.

RATIOS

However, an investor has to also consider information of some ratios that contribute in the estimation of the variation on the stock’s price. The valuation measures comprise of values such as price-to-book and price-to-shares that accounted for 23.57 and 8.35 respectively. Furthermore, the price-earnings ratio is 90.86x. Over the last year, the return reached 48.14%. Additionally, the book value per share is 11.49.

In the below table, there is information regarding some ratios helpful to understand the firm’s Profitability, Asset Turnover and Short-Term Liquidity over the last decade.

SWOT Analysis

STRENGTHS

Nowadays, Netflix is the most popular streaming service for movies and television shows around the globe with a share price growth over 6000% since 2007. In 2016, Netflix was globally streaming through 190 countries, accumulating to 100 million subscribers. This strength increases the bargaining power when in negotiations with studios to acquire exclusive content. Over the last years, Netflix has acquired several original shows that have fascinated to audiences. Specifically, in 2017, number of subscribers significantly increased, growing from 83 million to over 100 million in one quarter only. Another strength of Netflix is that it is an ad-free streaming service. Many objections among customers who view television were far too many advertisements. When Netflix was originated, it originally streamed past popular shows like Friends, but in recent years, the firm creates its original tv series and movies that have become huge success such as House of Cards, Stranger Things etc. The most significant advantage of the Netflix’s tv series is that distributes the whole season rather than the classic week-to-week episodes, which is quite attractive to the audience because they are not forced to wait each week for a new episode. Finally, as far as the stock is concerned, Netflix made deals with certain content suppliers that permitted them to contribute in profit sharing or for Netflix to pay-per-usage for content. This allowed Netflix to keep a lower operating cost on content, delivering more financial stability and flexibility.

WEAKNESSES

Although Netflix’s original tv shows and movies creates a reasonable benefit for the firm, the expenses continue to grow to support the content. Specifically, since most renowned films that the viewers would consider significant are produced by only a minority of big studios, there is small antagonism among large providers. The competition shortage generates high provider’s control of licencing agreements and associated costs. In 2017, Netflix invested $2.5 billion only on acquiring original content rights. Furthermore, Netflix does not own most of their current content, and hence, rights usually terminate after a year and the original content can be acquired by rival companies. Recently, Netflix subscription price was increased, generating huge criticism and lack of faith by consumers towards the management board. To underpin the previously mentioned, the firm lost many of the subscribers as well as it has experienced a sharp drop in stock value. Finally, Netflix has been credited ‘D’ in terms of environmental awareness and as a result, the company has converted in notorious status while competitors, such as Amazon and Facebook, use over 40% renewable energy.

OPPURTUNITIES

New opportunities can arise across the globe. Specifically, Netflix belongs to one of multiple online pages that are prohibited from the public due to traditional means and hence, the firm should discover techniques to surpass these barriers such as find a lookalike venture in order to exploit on the 500m Chinese consumers who are currently enjoying local media content. This has a desirable outcome because it is already in effect in Europe, where Netflix is partnering with BBC, not only to comply with European laws, but to also understand and evaluate the European customer market. As technology continues to grow, the demand of the audience becomes higher and so, anyone can watch tv shows and movies in smartphones and tablets. Netflix should take advantage of this situations and provide higher quality (i.e. VR and 4K) on these devices which is equivalent the customer’s desire. As far as innovation is concerned, there is not currently a streaming service that offers videogames on demand option that it will reflect to a higher proportion of the customers base.

THREATS

Many companies have tried to compete against traditional media by launching their on original content like Amazon, Hulu, YouTube etc. These companies are seeking attention from the public in order to earn their subscription to their streaming services. The competition will firmly increase and for Netflix, this will have obviously undesirable effects because many different firms will try to acquire original content exclusively for their platform. Netflix also made a deal with Disney to be able to show their animated films. However, this has essentially fell through as Disney is creating its own streaming service. Monthly subscriptions seem to be the future for television and content invention.

1. Pdf
2. https://businessteacher.org.uk/swot/netflix.php
3. https://pestleanalysis.com/swot-analysis-of-netflix/

CONCLUSION

Netflix is a crucial beneficiary & driver of the ongoing interruption of linear television, with the firms’ content performs well worldwide & drives subscriber growth, further revenue, and growing profit. I expect Netflix to continue to benefit from the world-wide spread of Internet-connected devices and increasing user preference for on-demand video consumption over the Internet, with Netflix on its way to surpass 200 million global subscriptions by 2021. I firmly believe Netflix has significant leverage in its service type as higher subscriptions have a disproportionately larger impact on profit against relatively fixed content costs.