Netflix (NADSAQ:NFLX) may be one of the hottest stocks around but the media company still has a ways to go to bring cautious investors on board, many of whom look ahead and see the rise of competing streaming services with their own bankable content.
This week, Netflix made headlines by passing heavyweights Comcast and, briefly, Disney in terms of market capitalization and the share price hit a new high of $354.36 in Friday trading (all figures in US dollars unless noted otherwise). Year to date, Netflix has produced an astounding 73 per cent return.
And with 125 million subscribers worldwide and tonnes of runway for expansion, it may look like there’s little to worry about going forward, especially as the company continues to pour money into original content — Netflix is planning to spend $8 billion in 2018 producing 700 TV shows and 80 movies.
But while that kind of investment looks like the mark of a company intent on growth, the lack of focus on profitability is a problem to some.
“They need to keep on borrowing as they are investing so much so quickly in content and have to stay ahead, there’s nothing else they can do,” says Tom Harrington, an analyst at Enders, to the Guardian. “They have to stay ahead of Amazon and Apple, and soon Disney. They are at the moment but there are very well funded, larger, competitors starting to get their act together.”
Stan Wong, portfolio manager and director of wealth management at Scotia Wealth, says it’s the looming possibility that Netflix’s growth may hit a wall that keeps him away from the stock.
“It has has always done so well, but valuation has been the Achilles heel for me when looking at these types of companies,” Wong told BNN Bloomberg. “Right now, Netflix is trading at about 100x forward earnings with a 45 per cent growth rate — and that sounds great from the growth rate but what if something goes wrong? What if competition comes in and hurts the earnings coming out of Netflix?”
“Netflix is spending $8 billion on content over 2018, which has always been the issue,” he says. “They’re always spending a lot, there’s a lot of cash flow, they’re actually negative free cash flow of $3 billion this year. What happens when Prime Video gets a little bit stronger? When Disney pulls all of their products off Netflix in the next year or so? There are some competition issues from a valuation standpoint that’s kept me away from the stock.”
Disney announced last August that it would be ending its licensing agreement with Netflix, although some of Disney’s content will still be available on Netflix as far ahead as 2020.
“Clearly, Netflix has done very well,” says Wong. “I’m a customer of Netflix, but I just think from a valuation standpoint, I’m staying away from it.”