Shares of Netflix are up just 9% this year, compared to about 25% for the broader S&P 500, and scrutiny on its subscriber growth, content slate and balance sheet aren't going to let up heading into 2020.
With more streaming rivals on the horizon, can Netflix get its stock growing substantially again? Below are some of the key themes to keep an eye on.
1. Growing Competition
Netflix (NFLX) - Get Report was a pioneer in streaming, having been the first to popularize the SVOD (subscription video on demand) model that packages original content with syndicated shows for a monthly price. But the elevator is starting to get packed.
With Disney+ (DIS) - Get Report, and Apple TV+ (APPL) in the mix, and AT&T’s (T) - Get Report HBO Max, Comcast’s (CMCSA) - Get Report Peacock and others coming up in 2020, competition remains the elephant in the room for Netflix investors. Some analysts question how well Netflix’s subscriber base will hold up given an expanding slate of SVOD and AVOD options. In a recent note, Needham’s Laura Martin cautioned that Netflix could shed as many as 4 million U.S. subscribers next year. (It currently has around 60 million domestic subscribers.)
Given that the U.S. is its most mature market, and comprises about 40% of its total subscribers, any loss of domestic subs could mean a punishing hit to shares. Netflix’s stock slid for weeks after it posted its first sequential drop in U.S. subscribers in July 2019. Needham’s Martin suggested that Netflix may need to add a lower-cost tier better compete with the likes of Disney and Apple, which are $7 and $5 per month respectively. Whether it will or not, the pressure is on to keep its U.S. subscriber base locked.
2. International Growth
With domestic subscriptions potentially hitting a wall -- Netflix added just 500,000 U.S. subscribers last quarter, and saw a subscriber decline in the second quarter -- international growth is Netflix’s next frontier.
Management has its eyes trained on India. Speaking in a recent interview, Netflix CEO Reed Hastings said that Netflix plans to spend $420 million creating content for the growing market in 2020, roughly matching its pace of spending in India compared to 2019. The majority of that spending will be in spinning up original shows geared at Indian audiences. In addition, Netflix is also expected to roll out more low-cost, mobile plans in Southeast Asia.
The company set a goal of attracting 100 million subscribers in India -- an ambitious target, considering it now has approximately 4 million subscribers in India, according to IHS Markit. However, Netflix has also pledged more transparency in its international performance. Starting in the fourth quarter and onwards, it will begin breaking out revenue and subscriber figures for four regions (Asia Pacific (APAC), Europe, Middle East & Africa (EMEA), Latin America (LATAM) and U.S. and Canada (UCAN), which will help investors read the tea leaves on its all-important international growth
3. Content Fragmentation
There’s no question that Netflix is a popular pastime -- the company says it commands about 10% of total TV screen time in the U.S., and CEO Reed Hastings has characterized its biggest competition as traditional linear TV. But less is known about what, specifically, viewers are watching -- and what that means for Netflix going forward.
Third-party research suggests that the most-watched shows on Netflix aren’t its big-budget original programs, such as Stranger Things or Orange is the New Black. With competition intensifying next year, we’ll see even more of a land grab for the most popular evergreen shows. Wedbush Securities estimates that shows controlled by AT&T, Comcast and Disney account about 65% of total viewing hours on Netflix, some of which will disappear as their respective offerings come online and licensing deals expire. Netflix will make up for some of that with perennial hits like Seinfeld, which it secured earlier this year, but it won’t come cheap -- five-year streaming rights for Seinfeld reportedly cost Netflix $600 million.
The costs of both producing and acquiring content have grown at a breakneck pace -- the cost of a typical premium show ballooned by 30% from 2018 to 2019, Netflix content chief Ted Sarandos estimated recently. And more bearish analysts are skeptical that Netflix, as a pure-play streaming business with $19.1 billion in content obligations as of September, will be able to balance its books forever.