Plenty of rumors circulated beforehand about what Apple would announce, yet no specific numbers concerning pricing or spending were released. The event itself was not a signal that would cause Netflix's (NFLX - Get Report) shareholders to sell their shares.
But wise investors should at least have some healthy skepticism of Netflix's continued ability to dominate the streaming content industry. In fact, over the past six months, Netflix's stock has dropped 7%, underperforming the Nasdaq by several percentage points.
Netflix and The Competition
Apple's announcements were not necessarily planned to spook Netflix, but to lay the foundation for Apple's Service opportunity to continue to grow. Furthermore, Apple's balance sheet carries a net cash position of $130 billion, which translates into plenty of firepower.
Many analysts continue to laud Netflix's $12 billion spent on content during 2018 as an indication that Apple has a lot of catching up to do. So with Apple having reportedly spent just $1 billion on content in 2018, do Netflix's 150 million subscribers truly make for an unbeatable competitive advantage? I contend that it does not.
Apple has 1.4 billion active devices. That is not to say that all those active devices owners would necessarily subscribe to Apple's content. What it does mean, though, is that Apple is potentially yet another option for consumers to choose from instead of sticking with Netflix.
Separately, Disney's (DIS - Get Report) own Direct To Consumer (DTC) platform is expected to launch in the fall of this year. Accordingly, Disney's content will be pulled from Netflix's platform over time, as Disney readies its own content library. While Disney has few DTC subscribers now other than those to its ESPN+ service, Disney does have a very strong line up of brands that families know and love.
As Disney seeks to starve consumers of its top brand and pivots towards its own platform, Netflix's library may be left with an overabundance of shows, albeit lacking the truly top-quality programming its subscribers have become accustomed to.
Is It Risky To Invest In Netflix?
Investors have come to believe that the stability in Netflix's share price and the stock's continuous appreciation over the past several years implies that there is minimal risk of investing in Netflix. This lack of skepticism could not be more unfounded. In fact, there has not been a more risky time to invest in Netflix than right now.
During the past three years, Netflix's revenue has increased by 78%, while its interest expense has soared by 280%. And while Netflix has been quick to minimize the fact that its revenue guidance for Q1 2019 is pointed towards just 22% year-over-year growth, blaming its subdued top-line growth on price increases, I caution Netflix investors against being complacent with their investment.
Valuation -The Margin Of Safety?
As the table above shows, Netflix's peers are being priced at approximately 3x their sales, both historically and currently. However, Netflix is the only outlier, as its current valuation is actually closer to 40% more expensive than its 5-year historical average.
Which begs the question, are investors getting any margin of safety at present? I argue that they are not. Netflix is the only company amongst its peer group that generates no cash and must continue to resort to debt markets to fend off the competition. And with rising interest expenses, increasing debt load and decelerating revenue growth, investors might not want to stick around for the end of this show.
Buy And Hold Forever?
Warren Buffett taught investors that the best investment strategy was to find solid companies led by terrific management and to hold these investments forever. Many shareholders are looking to Netflix as their one buy and hold investment. The problem, though, is that everyone else is thinking the same thing, fully eroding their potential return and replacing it with a very risky investment.
Will I Have Enough Money to Retire?
Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.