Netflix, Inc. (NASDAQ:NFLX) stock bears felt pretty smart at the beginning of this year, but they are eating their words now. Since early February, Netflix stock has surged more than 32%!
Commanding a price-to-earnings (P/E) multiple of 391X, Netflix shares are certainly not cheap. But if you think about what the company could accomplish next, you’d see that the stock is not that expensive either.
Netflix Stock Bears About to Be Wrong Again?
Being the market leader is no doubt a huge achievement. However, it could also put the company under the microscope.
Netflix’s subscriber base reached the 75-million milestone on January 1 of this year. However, markets didn’t really cheer up on the news. There is a good reason for that reaction: when the current userbase is so huge, is there any growth left for the future?
It doesn’t help Netflix’s case when competition is also getting intense in the on-demand video streaming business. Other than Netflix, viewers can also stream from providers like Hulu and Amazon.com, Inc. (NASDAQ:AMZN). Moreover, traditional TV networks have also started rolling out on-demand viewing of their programs.
Investors’ biggest concern would probably be the threat from Amazon. The e-commerce giant doesn’t market its on-demand “Amazon Video” segment as a standalone service. Instead, its streaming service is offered for free to customers with an “Amazon Prime” subscription. This means that by streaming with Amazon, viewers can also enjoy unlimited two-day shipping on millions of goods.
Should this worry Netflix? Not really.
You see, although Amazon is king of the e-commerce industry, its on-demand video streaming service is only available in a handful of countries: the U.S., the U.K., Japan, Austria, and Germany.
Other companies are constrained by the geographical availability of their services as well. For instance, Hulu’s on-demand video streaming service is only available in the U.S. (Source: “Why Can’t I Use Hulu Internationally?” Hulu, last accessed April 13, 2016.)
That’s why Netflix has nothing to worry about. This January, the company announced that it has become almost fully global. Netflix’s on-demand video streaming service is now available everywhere in the world except China.
By entering an additional 130 countries, the company has expanded its addressable market by 190 million broadband homes. Moreover, because competitors are yet to tap into most of these markets, Netflix can enjoy the first-mover advantage. (Source: “Q4 15 Letter to Shareholders,” Netflix, Inc., January 19, 2016.)
Of course, Netflix stock bears would still argue that Amazon has a solid original content library. The thing is, though, it doesn’t really matter how great Netflix’s competitors’ shows might be. Even if some other company makes a great show, are consumers really going to forgo their Netflix-only favorites, especially when Netflix charges less than 10 bucks a month?
The likely scenario is that if consumers enjoy shows from another streaming provider, they would just subscribe to both Netflix and that provider. For instance, if you are a huge Game of Thrones fan and want to watch the newest season coming out this month, you are probably not going to cancel your Netflix subscription and go to “HBO Now.” Instead, you might add HBO Now, while still enjoying House of Cards and Narcos from Netflix.
Netflix’s appeal is just too strong to ignore at the price it charges. Even when it raised its price by $1.00 last year—which represented an 11.1% price increase from the previous $8.99—viewers didn’t leave. In fact, Netflix’s subscriber base continued to expand rapidly after the price increase.
The Bottom Line on NFLX Stock
At the end of the day, a great business has to generate profits for the company. That’s why investors are onboard with Netflix stock. Fortunately, global subscriber growth could be strong and the company continues to expect “material global profits” starting in 2017.
Netflix is scheduled to release its Q1 2015 earnings after the closing bell on Monday, April 18. This would be its first earnings report after going (almost) fully global. If user growth turns out to be better than its forecasted 6.1 million, the report’s numbers could spark a new rally in NFLX stock.