Netflix (NFLX) Stock Analysis & Forecast

Investing
Updated: 21st Apr 2021
Written by Sean Graytok
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April 21, 2021
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Netflix has been the streaming leader for years — but its stock has been up and down all year.

So, is Netflix stock a buy? Let’s find out in this Netflix Stock Forecast and Analysis.

What is Netflix?

Netflix is a content platform and production company founded in 1997 by Reed Hastings and Marc Randolph.

It infamously retired Blockbuster and has revolutionized the entertainment industry ever since.

Today, Netflix is a $250 billion dollar company that continues to stay ahead of the curve. Let’s examine its investment potential and market outlook.

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Netflix Stock Investment Potential

#1. Winner Take Most

While we expect consumers to pay for multiple streaming services, the video-on-demand market is a “Winner Take Most” environment.

There are nine notable streaming platforms, but we believe most consumers will aggregate to 2-4 of them, with Netflix being non-negotiable.

Netflix’s brand awareness is so strong that people often conflate “streaming” with “Netflix” – it’s one and the same to them.

In a recent Morgan Stanley survey, 58% of U.S. respondents use Netflix, 45% use Prime Video, 35% use Hulu, 31% use Disney+, and 20% use HBO.

Note: The Prime Video number is misleading because the service is included with a Prime Membership, which already has 150 million subscribers.

#2. Future of Streaming + Death of Linear TV

Netflix put the user in control of when, where, and how much they watch – this changed the entertainment industry forever.

Netflix created the market that it now dominates while simultaneously killing the “linear TV” model.

Linear TV boils down to the number of eyeballs in front of a program at a specific time slot – it’s all about advertising.

Netflix essentially told its users to pay us a small monthly fee and remove Bud Light ads from their viewing experience. In addition, you will be in complete control of your content consumption and not at the mercy of TV (and advertising) executives.

Netflix completely transformed consumer behavior (demand side) and forced the entertainment supply side to adjust accordingly.

The company benefits from its first-mover advantage by iterating on strategies for decades – the other streaming services are playing catch-up and making mistakes that Netflix already learned in 2012.

#3. Original Content

Two kinds of Netflix exist: Netflix before House of Cards and Netflix after House of Cards.

The company took a massive risk in 2013 when it paid $100 million for two seasons of House of Cards. This was the company’s first foray into original content. Netflix decided to go all-in.

The risk was worth it – subscriptions skyrocketed after the series’ debut and set Netflix on a new trajectory of creating its own content.

Since House of Cards, Netflix has produced several award-winning shows, like The Crown, Stranger Things, Ozark, and Narcos. So, why is this important for Netflix stock?

Netflix’s key performance indicator is its number of subscribers.

Subscriber acquisition and retention boils down to the quality of content on the platform.

Next, owning the intellectual property ensures that the show or movie will only ever be available on Netflix. This guaranteed scarcity and exclusivity drives more users to the platform.

In addition, a monopoly on the IP allows Netflix to behave more like Disney+, which monetizes its content off-platform via merchandise and experiences.

Netflix is no longer just the distributor of content – it is the content.

#4. The Numbers Aren’t Telling the Whole Story

Netflix has 204 million paying subscribers with possibly 5x the audience.

Everybody shares their Netflix account with family and friends. This was great for brand recognition in the early stages of growth, but the company has since matured and fails to monetize hundreds of millions of viewers.

The company has hinted at cracking down on password sharing, which it inevitably will and should complete.

In a recent earnings call, Netflix Co-CEO Reed Hastings said that the company will never roll something out that “feels like turning the screws”.

He noted that Netflix’s course of action around password sharing must make sense to the consumer.

Netflix users (the non-paying ones) might be upset with the company in the short term, but we believe this decision will be bullish for the stock in the long term.

Netflix has become a commodity to consumers of content, and we expect most freeloaders to pay up. This will increase that 204 million number to who-knows-how-high levels.

Not only will it increase the subscriber base, but more individualized viewing will provide the Netflix algorithm with better data and allow it to improve the viewing experience.

More accurate data on what a single user likes and dislikes enables Netflix to offer more robust content.

#5. Data on Niche Audiences

Netflix is constantly under pressure to entertain its subscribers. While a good movie is a good movie, and most of its subscribers are likely to enjoy, more granularized data allows Netflix to identify niche audiences.

For example, more precise data (from cracking down on password sharing) theoretically allows the company to determine how many subscribers between the ages of 18-49 live in California and like watching crime thrillers based in Los Angeles.

Or the number of Midwest subscribers under the age of 25 that love WWII documentaries.

These insights allow Netflix to create or buy more content that it knows niche audiences will consume.

Netflix can also optimize spending because it can calculate how much that content is worth based on viewership projections from precise data.

This bottom-up approach might be criticized by the creative types, but it will provide immense value for Netflix shareholders.

See: Airbnb Stock Analysis

Netflix Stock Moat

A company’s “moat” typically refers to its differentiation from competitors. A moat cannot be easily replicable and therefore protects the company’s market share and profitability.

We believe the following equation describes Netflix’s moat:

First Mover Advantage + More Original Content

Netflix made this market, and many of its advantages can be attributed to being the first streamer. Its brand recognition and customer loyalty were established before many of its competitors even existed.

“Netflix and Chill” is organic advertising spread by satisfied customers – the company is deeply embedded in the zeitgeist.

In addition, creating and distributing original content has a large barrier to entry. While existing companies are launching streaming services left, and right, it’s a difficult market to “disrupt” because the product is so expensive.

Entertainment categories like TV shows, movies, and documentaries cost exorbitant amounts of money to make. Two kids in their college dorm room can’t code up a platform that also streams Games of Thrones – it’s against the law.

See: Coinbase Stock Analysis

Netflix Stock Analysis

Netflix’s latest earnings report was quite eventful — shares fell as much as 11% in after-hours trading after reporting a large miss in Q1’21 subscriber numbers.

However, this was expected; the pandemic had accelerated quarters worth of growth into a shorter window of time. In addition, Covid-19 shutdowns forced the company to delay its big-name shows and movies.

Regardless, let’s examine the key highlights from the April 20th call:

  • Revenue: $7.16 billion vs $7.13 billion expected, up 24% YoY
  • Earnings per share (EPS): $3.75 vs $2.97 expected
  • Global paid net subscriber additions: 3.98 million vs 6.2 million expected

Netflix said that production has resumed in nearly all of its major markets — expect a 2021 slate that is more heavily second-half weighted.

The company plans to spend $17 billion in cash on content this year.

Netflix CFO Spencer Neumann told investors, “The key is the business remains healthy… and the business is still growing.”

See: Palantir Stock Analysis

Netflix Stock Competition

The Streaming Wars will continue to intensify as companies divert from linear TV. Let’s look at Netflix’s top competitors:

  • Disney+ (DIS)
  • HBO Max (T)
  • Amazon Prime Video (AMZN)
  • Hulu (DIS)
  • Peacock (CMCSA)
  • Apple TV+ (AAPL)
  • Paramount+ (VIAC)
  • Discovery+ (DISCA)
  • Spotify (SPOT)

Here is the 2021 market share percentages of the streaming services:

  1. Netflix (20%)
  2. Amazon Prime Video (16%)
  3. Hulu (13%)
  4. HBO Max (12%)
  5. Disney+ (11%)
  6. Apple TV+ (5%)
  7. Peacock (5%)
  8. Paramount+ (3%)
  9. Other (15%)

Prime Video is doing some damage – it received 12 nominations in the most recent Academy Awards. Granted, Amazon Studios is subsidized by AWS and can therefore operate at an enormous loss.

However, Netflix’s most pressing competitor is Disney+.

See: Tesla Stock Analysis

Netflix Stock Bear Case

#1. Disney+

Disney+ launched in 2019 and is already approaching 100 million subscribers. As previously mentioned, we believe the average consumer is willing to pay for more than one streaming service, but Disney+ is gunning for the top spot.

From an optics perspective, Netflix getting replaced as the don of streaming will be bearish for the stock. So, how can Disney+ usurp Netflix?

Disney has a monopoly on the most nostalgic IP on earth – from The Lion King to Iron Man, to Star Wars, Disney+ is the only service that can stream it.

Disney can also incentivize sign-ups in a variety of off-platform ways, as special park passes to subscribers or VIP access on cruises. Netflix doesn’t make roller coasters.

In addition to these incentives, Disney+ serves as a continuous, in-home advertisement for The Walt Disney Company.

Disney+ can undercut Netflix on pricing because of the ways it can monetize subs off-platform. Barring a Stranger Things collab with Nike, Netflix has limited streams of off-platform revenue.

We’re not insinuating that Netflix should open a theme park in the Ozarks or launch a Stranger Things cruise ship, but Disney+ does enjoy advantages that Netflix cannot replicate.

Netflix must continue to hit home runs with original content to mitigate these threats.

#2. Better Upside Elsewhere

Netflix stock is up ~30,000% since its IPO in 2002. It still has exciting investment potential, but there might be better upside in other names.

Note that higher growth comes with more risk, especially in the streaming sector, where the few winners will dominate the entire market.

See: Disney Stock Analysis

Netflix Stock Allocation in Your Portfolio

Stock allocations are not one-size-fits-all. However, the following questions might help measure your conviction on Netflix stock:

  • Can Netflix and Disney+ coexist?
  • What happens to NFLX stock if Disney+ surpasses Netflix’s subscriber count?
  • Can Netflix continue its success with original content?
  • Will cracking down on password sharing be bullish or bearish for Netflix stock?
  • How will not relying on outside capital affect the stock?
  • Are the current trends in entertainment favorable for Netflix stock?
  • What additional services can Netflix offer?
  • Can Netflix effectively enter new markets to diversify revenue?

See: Square Stock Analysis

Bonus: Expert Coverage on Netflix Stock

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See: Motley Fool Review

Netflix Stock Analysis FAQs

Is Netflix stock a good buy?

Many Wall Street analysts rate Netflix stock a “buy” because it has the most powerful streaming platform. It has 200+ million subscribers and is churning out its own content at an impressive rate.

Does Netflix pay a dividend?

Netflix does not pay a dividend and has just recently turned a profit. It is atypical for high-growth tech companies to pay a dividend because they’d rather reinvest earnings into growth. Do not expect Netflix to pay a dividend anytime soon.

Why is Netflix in debt?

Content is very costly, and Netflix buys a lot of it. After all, content is the business. The company raised $15 billion of debt since 2011 to pay for new content.

Will Netflix ever make a profit?

Netflix announced that it was positive $1.9 billion in free cash flow for the full year 2020 and expects to break even in 2021. This was great news for the stock and its shareholders – Netflix was yet to turn a profit in its 24 years as a company.

See: Microsoft Stock Analysis

Bottom Line: Netflix Stock Analysis

It is difficult to accurately price a company that creates a new market. This has been the case with Netflix for years – just look at its wild chart.

However, streaming is here to stay, and Netflix is the top dog. Investors who can stomach the volatility will likely be rewarded.

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Sean Graytok owns shares of Netflix Inc.

Sean Graytok
Sean Graytok
Sean is a lifelong student of the financial, media, and marketing industries. He is a Generation Z investing expert and is on a mission to empower investors to make the most of their money.