Netflix (NFLX) , the only media streaming service with a global presence, could prove to be a multibagger as it continues to disrupt traditional forms of viewing and distribution of television content.
Yet the stock, which is up about 7% year to date, also presents certain challenges for investors. Investors should be prepared for a bumpy ride, but those who can wait out the company's growing original content business and growth challenges in some overseas markets may see a huge, long-term upside.
Netflix shares were roughly flat in Thursday trading.
Netflix shares have seemed especially sensitive to big announcements and events. For instance, last month, the stock rose about 20% in the hours after announcing that it blasted past growth estimates for the third quarter. This contrasted with mid-July, when Netflix fell about 13% after reporting second quarter numbers that missed Wall Street expectations.
U.S. Markets Saturation
Netflix initially grew by starting in the DVD by mail business, then launched streaming media and has now made a successful entry into the film and television industry by acquiring and developing original content. Its success in creating entertainment has enabled it to snatch up customers.
However, Netflix (or rather the American market) is seemingly reaching a point of saturation. Its core demographic, of affluent, young-to-middle-aged Americans, is a niche segment. Plus, Amazon Video, Alphabet-owned YouTube, Hulu, Crackle and Mindshare are vying for the same customers.
The slowdown in the U.S. has meant that Netflix has had to turbocharge its international expansion. So far, it's doing great. Even without China, Netflix added 3.2 million subscribers internationally last quarter. Wall Street was looking at a number that was a little more than 2 million. As long Netflix beats its own guidance and the Street's expectations on the global subscriber addition front, investors will bid up the shares.
Looking toward the fourth quarter, Netflix has said it expects to add 3.75 million subscribers internationally. China has been a tough market to crack due to the severe regulatory environment. To wit, Walt Disney's Chinese streaming service, launched in conjunction with Alibaba, had to be closed down. Apple's movie offering faced the same fate.
Uncertainty About Regional Content
As Netflix tries to provide content offline in some global regions similar to Amazon Prime Instant Video or YouTube, its expansive, expensive global strategy means that it has to produce tons of content that can engage viewers on a regional level. American stars and shows may get eyeballs in the U.S., but will they have the same pull in Asia? Netflix wants to become a worldwide TV network, but it can't do that without entertaining viewers equally in different regions.
Netflix is reportedly spending $6 billion a year to boost its original content from 600 to 1,000 hours. But this commitment will come with enormous costs, not only for production but in marketing. If it is unable to produce high-quality fare, or more importantly, to draw enough viewers, it will have to answer to skeptical analysts and impatient investors.
The upshot: If you're not risk averse, buy Netflix and hang onto the stock during its inevitable ups and downs. It's on a long-term upward trajectory, but you may need to be patient.
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