Great people are often modest. The same can also be said for great companies and Netflix, Inc. (NASDAQ:NFLX) is a good example. In the past several years, Netflix stock soared through the roof, as the company took a huge amount of business away from traditional TV networks. But instead of bragging about its accomplishments, Netflix remains modest.
Why Netflix Stock Bears Are Wrong
In a previous earnings report, the company said it prefers to describe the shift to on-demand video streaming as “consumers evolving vs. old habits” rather than “Netflix vs. traditional media.” (Source: “Final Q3 2015 Letter to Shareholders With Tables,” Netflix, Inc., October 14, 2015.)
Sure, that’s one way to look at it. But note this: it was Netflix that gave viewers the option to stream TV shows and movies on-demand so the secular shift could take place. In the process, Netflix is also taking a serious chunk of business away from broadcast TV.
Michael Nathanson, analyst at research firm Moffett Nathanson, calculated that in 2015, Netflix accounted for about half of the overall decline in TV viewing in the U.S. (Source: “Netflix Caused 50% of U.S. TV Viewing Drop in 2015,” Variety, March 3, 2016.)
The analyst said that while Netflix is not “necessarily a cause of industry death,” it is currently “a source of industry pain.”
Markets reward those who are doing well. Since investors noticed Netflix’s potential, its stock has been steadily climbing upward. In the past five years, Netflix’s stock price has more than tripled. Last year was particularly impressive as NFLX stock turned out to be the top gainer among all S&P 500 companies.
Of course, when a stock goes up by that much, concerns start to appear. If your company is carrying a 300+ price-to-earnings multiple, you better address those concerns before that level becomes unsustainable.
Most recently, the concern is that TV producers might decide not to give streaming companies timely access to their shows. This would mean viewers of streaming services, such as Netflix, might have to wait a long time before they can watch the newest seasons or episodes of their favorite shows. That would be a huge hit to the streaming industry.
But let’s not forget that Netflix has perhaps the best original content library among its peers. Netflix originals such as House of Cards, Narcos, and Marvel’s Daredevil have huge followings around the world.
The most impressive part is that Netflix earned eight Golden Globe nominations this year. That’s not just more than Amazon.com, Inc. (NASDAQ:AMZN) or Hulu, but also more than any TV network. (Source: “Golden Globes Nominations 2016: Complete List and Analysis,” The Washington Post, December 10, 2015.)
The neat thing is that all that great original content, along with thousands of hours of licensed content, can all be had for less than 10 bucks a month. The value proposition of Netflix is so strong that it’s hard not to have the service, especially when all your friends are talking about the latest episodes of House of Cards.
If I were to look at the situation, I’d probably be more worried about TV networks than Netflix. A new survey by Robert W. Baird & Co. suggested that traditional TV services are losing their appeal. (Source: “Netflix, Amazon, Akamai Benefiting from Cable Cord-Cutters,” Investor’s Business Daily, March 16, 2016.)
According to the survey, 51% of respondents said that they are considering canceling or reducing their pay TV service. As for the reason, “price remains far and away the NO. 1 dissatisfaction with traditional cable service, followed by streaming alternatives and paying for more channels than you need.” (Source: Ibid.)
The Bottom Line on NFLX Stock
Of course, Netflix is yet to realize material profits from its many markets around the world. But when it does, NFLX stock might not be trading at today’s price.