Boosting the Appeal of Netflix Stock?
Companies with high valuations tend to be scrutinized. This statement is especially true in the case of Netflix, Inc. (NASDAQ:NFLX) stock, which has had quite a choppy ride since entering 2016. Trading at more than 300 times its earnings, Netflix stock is constantly being placed under the microscope. Even the slightest hint of a slowdown in growth could lead to a massive drop in the company’s stock price.
Of course, it doesn’t help that Netflix is relying mostly on one line of business—on-demand video streaming—while many tech giants are stepping outside their comfort zones to expand their business lines. For instance, a social media company is making virtual reality headsets, while a smartphone maker is rumored to be developing driverless cars. To many investors, companies with multiple sources of future growth are more appealing than one that’s earning most of its revenue from a single business.
But what if that single line of business works out so well that it’s revolutionizing an entire industry? Well, in that case, the company could still have a chance. As a matter of fact, despite its lackluster performance in recent months, Netflix stock was the top gainer among all S&P 500 companies in 2015.
In the past several years, Netflix has gained a substantial amount of subscribers. At the same time, it served as a disruptive force to the cable television industry. It was estimated by MoffettNathanson that in 2015, Netflix was responsible for about half of the overall decline in cable TV viewing in the U.S. (Source: “Netflix Caused 50% of U.S. TV Viewing Drop in 2015,” Variety, March 3, 2016.)
Netflix’s appeal is simple. For just 10 bucks a month, you get access to Netflix’s giant content library anytime, anywhere as long as you have an Internet connection.
The company received eight Golden Globe nominations last year, which was more than not just any other video streaming company, but also any TV network.
So, if you are a TV viewer, you have two choices: you could keep your TV set-top box from your cable provider or pick up one of many tech devices that allow you to stream Netflix. At least, that used to be the case…
Now, however, there’s a third choice: Comcast Corporation (NASDAQ:CMCSA)—one of the biggest cable TV companies in the world—just said that its latest “X1” set-top box will support Netflix streaming. (Source: “Comcast to Add Netflix to Latest Set-Top Boxes,” The Wall Street Journal, July 5, 2016.) That means that in the future, if you are a Netflix subscriber, you can access Netflix programming directly from Comcast’s cable box.
This is a big deal for Netflix because with one of the biggest cable companies in the U.S. supporting its programming, it would get access to a huge base of cable TV customers. Comcast said earlier this year that approximately 35% of its customers have the latest X1 set-top boxes and its goal is to increase that share to 50% by the end of 2016. That opens up a lot of potential subscriber growth for Netflix.
Note, too, that one of the reasons behind Netflix stock’s downfall was its user growth in the U.S. In the past few quarters, the company’s net subscriber additions in the U.S. have been slowing. With exposure to the cable giant’s customers, Netflix could improve its user growth again.
This is also proof of Netflix’s ability to reshape the cable TV industry. Even though Netflix is now almost fully global and has more than 81 million subscribers, there were still doubts as to what the future holds for the company—in particular, what if cable TV companies start offering streaming services as well? Well, now it’s pretty clear that Netflix is still going to be around. In fact, with Comcast taking this giant step, I wouldn’t be surprised if more cable providers start supporting Netflix programming on their set-top boxes.
The Bottom Line on NFLX Stock
There you have it. Netflix is not going to destroy the cable industry. Instead, it’s going to improve it by being an add-on option to millions of viewers who have cable boxes. That should give investors a new reason to be bullish on Netflix stock.