Netflix Inc. (NASDAQ:NFLX) stock is falling due to pressure from other streaming services and low margins.
Earnings Report
Last week we reported on Netflix’s earnings report, which was much in line with what investors were expecting and within the guidance offered by Netflix in the previous quarter. As a result, the stock fell 5% in the following days, falling fall from a height of $355 to $325 currently, the stock’s all-time high was $423 in the summer. Below are a few highlights from their key financial indicators:
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- Operating income doubled over the last 12 months, which in turn doubled Earnings Per Share (EPS) from $1.25 to $2.68, showing the company overall is becoming more profitable.
- International Streaming is finally contributing to margins instead of costing the company money to run, and in this process is the key growth segment for the company.
- The U.S market continues to be highly profitable for the company, and depending on the reaction to the most recent price increase, it is likely to remain that way for some time.
- Long term debt has increased from $10 billion at the end of 2016 to $20 billion at the end of 2018, interest rates were very low during this period, which makes it a good time to invest in content and intellectual property.
- Operating margin was 5% for the quarter and 10% overall for the year.
- The biggest impact on Netflix value is currently speculation around other streaming platforms, most importantly Disney’s expected service to launch in 2019.
While in their letter to shareholders, Netflix noted their priority is the experience they can deliver, not their competition. Walt Disney Co’s (NYSE:DIS) Disney+ seems to have media and investors bearish on the stock. It’s hard to determine the short-term value of the stock when so much of their business is license based, so they have to determine the value of the content they license and have less control over the agreements. Netflix is transitioning more towards original content which fundamentally changes the financing model of the company, with all investment up front, then realizing returns as their catalog builds over time. They also then have the option to license the content out themselves or show it in movie theatres as they have been experimenting with.
Anyone following Netflix knows that the company already had a big change in their direction before, changing from a DVD by mail based company into a streaming based one. That change took large investments and patience from shareholders to realize the value, and the latest transition to original content will no doubt require the same. CNBC pointed out this morning that the stock value fell 3% even though Netflix original content was nominated for 13 Oscars. The future of the company will rest on the value users place on the original content, and Netflix’s ability to retain second run programming as they create their own library.
