Netflix stock news: investor debate unresolved as Q4 report raises new questions
14:34, 30 January 2020
Streaming behemoth Netflix entered 2020 the same way it ended 2019 as one of the most debated large-cap stocks among investors. The company’s fourth quarter results on January 21 did little to resolve the debate as bulls and bears each pointed to different pieces of news to bolster their arguments.
Netflix stock price analysis: 2019 Recap
Netflix’s stock ended in 2019 as the top-performing stock of the decade with a mind-boggling return of more than 4,000 per cent. But narrowing the timeline tells a slightly different story. Netflix’s stock opened for trading on January 2, 2019 at $259.28 and closed on December 31 at $323.57 – good for an approximate 25 per cent gain. Granted, this is nothing to complain about, but the stock underperformed many of its internet peers along with the broader major indices, which gained around 30 per cent.
Here is a look at recent developments that should give investors ammunition to buy or sell Netflix shares.
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Netflix stock news: beating expectations – sort of
The most recent news about Netflix stock consists of its fourth quarter earnings report which came in better than expected. The company earned $1.30 per share in the quarter on revenue of $5.47 billion while Wall Street analysts were modelling an EPS of 53 cents on revenue of $5.47 billion.
The average revenue per user rose 9 per cent from the same quarter last year while the company added 8.8 million net new subscribers. This figure came in ahead of management’s own guidance of 7.6 million net new users.
So far so good? Yes. But ignoring what came next is key to analysing Netflix stock news.
Netflix’s management cautioned investors it expects to add 7 million net subscribers in the first quarter of 2020, which represents a notable deceleration from the 9.6 million net users it added in the first quarter of 2019. The company acknowledged it will face “continued, slightly elevated churn levels” from the US due to pricing and competition.
Cause for concern
Up until just a few months ago, Netflix operated with minimal competition. But a swarm of new entrants from Disney, Apple, and Comcast has some investors worried and cited as one of the reasons why Netflix stock could go down.
The competitive landscape has put a company like Netflix in a position where it needs to spend to remain on top of the competition. And not just millions or tens of millions of dollars – but many billions of dollars.
Netflix is expected to spend around $12 billion in its platform and content throughout 2020. Analysts cannot agree on how much cash the company will burn in 2020 but the average estimate is pegged at around $2.5 billion. On the positive front, this figure represents an improvement of around $775 million from the prior.
Bulls will be quick to argue that Netflix needs to invest this much money to spur growth over the coming years. They argue that bears are ignoring the big picture: Netflix will be able to leverage its millions of new users it gains over the next few years to better convince the biggest names in the entertainment industry to produce content exclusively for Netflix. The Netflix of 2025 will be substantially larger and better than the Netflix of today.
There is some logic to this argument but at some point, investors could become fed up and throw in the towel. Why invest in a company that may be profitable in five or seven years when there are no shortages of companies that are very profitable today, such as Apple.
Many long-term investors are sitting on gains north of 1,000 per cent and could collectively decide in large numbers to dump the stock. This could create a ripple-effect that puts shares in danger of falling out of control.
Netflix shares: buy, sell or hold?
Is Netflix’s service overpriced? One of the more vocal critics of Netflix’s business is Laura Martin, a Wall Street analyst with the research firm Needham and someone who is a close follower of Netflix share price news.
Martin argued in a December downgrade that Netflix has a major problem on its hands that may be overlooked by investors. She notes that Netflix’s price point of $9 to $16 per month is substantially higher than competitors, who price their service anywhere from free to $7.
The analyst believes Netflix’s best path forward to prevent additional churn is to charge customers $5 to $7 per month. The company should have no difficulty in making up the shortfall through advertisements on its platform.
Failure to do so, according to Martin, is Netflix parting ways with 4 million subscribers in 2020 alone.
The most concerning part is that Netflix’s stock lost 10 per cent in the second quarter of 2019 when management said subscriptions fell by 126,000 – a figure that pales in comparison to millions.
Is it a good time to buy Netflix stock? According to Martin, the answer is a clear no.
Tech guru Marc Cuban is still a fan
It would not be fair to Netflix investors to present Martin’s bear case without balancing it with a bull who understands what is happening with Netflix stock. Tech investor, entrepreneur, “Shark Tank” personality, and Dallas Maverick owner Mark Cuban certainly knows a thing or two about stocks.
Exiting Netflix’s fourth quarter report, the billionaire called into CNBC to explain why he has not sold a single share.
Cuban said he is bullish on Netflix as the streaming media company is well-positioned to take advantage of multiple encouraging trends. Most notably, every single new smart TV sold will have Netflix either pre-installed or able to be added with ease. In addition, Netflix is finding its way on to new screens, including smart workout devices at gyms.
Beyond North America, Netflix stands to benefit from the advancement of “deep-fake” technology. Netflix will be able to take content made in any language and have the voice dubbed to cater to each individual market. Gone are the days of annoying subtitles that limit ultimate viewership as many people want to watch a TV series or movie and not have to read what amounts to a book to follow a story.
Finally, Cuban commented on Netflix’s concerning guidance and said this is merely par for the course. The company has a reputation for offering a concerning outlook and this is always the key debate exiting each earnings report.
“All the trends are going in their favour, more so than their competitors,” Cuban said.
Read more: Netflix share price forecast amid the streaming wars
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