Friday, 18th October 2019 10:00 - by Shant
Shares in Netflix have had a mixed week this week. Stock prices shot up by over 7.5% on Thursday pre-open after a mixed earnings report showing a beat on EPS of $1.47 vs expectations closer to $1.05. However, Netflix is all about subscribers and with domestic paid additions coming in at 517,000, this fell well short of expectations of circa 800,000. For Q4, Netflix projected $0.51 per share EPS and 7.6mln net additions globally. The lower projections - year on year saw Q4 at 8.8mln additions globally - are clearly in anticipation of the launch of streaming rivals Apple and Disney amongst others.
Naturally, CEO Read Hastings put a positive spin on upcoming developments, citing its key rival as broadcast television rather than alternative streaming brands. Disney has a strong back catalogue of content including Pixar and Marvel movies to draw in subscribers and will start at $6.99 a month, while Apple TV is starting its price point at $4.99 as a reflection of its more modest offering at initial launch. In contrast, Netflix has raised prices, with its lead HD package raised from $10.99 to $12.99 earlier this year. Management suggests this is warranted given the broad base of offerings on its platforms, and that established franchises elsewhere may suffer from burnout, while Netflix continues to explore fresh ideas and brands to incorporate into its subscription service. These are strong assumptions being made, though the company has a multi-billion dollar budget with which to pursue new and exciting 'projects'.
It is worth noting, however, that it will be losing some long favoured shows including 'Friends', which will move onto the HBO platform next year, so Netflix will have some empty spaces to fill. In trying to do so, Apple has oubid Netflix to obtain the rights to 'The Morning Show', while 'Fleabag' from the UK - receiving rave reviews was lost out to a collaboration between Amazon and the BBC. Big budgets maybe, but there is strong competition out there, and with share prices retracing a large chunk of the gains on Thursday, it seems reality was quick to hit home amongst investors as November draws near.
Adding to fears over the competition, we also have to take into account the broader outlook on the consumer - certainly in the US after the retail sales data came in below expectations. Competition for consumer discretionary is a concern I have raised on numerous occasions through the blog, and in light of this, Netflix - and its streaming rivals - will be no exception to this for sure. Granted, the monthly outlay is infinitesimal with regards to average disposable incomes, but if Netflix wants to increase its subscription base, then the latest price hikes (in January) may well have been ill-timed. Only a major improvement in content - 'Stranger Things' is doing well at the moment - will help justify these increases, so one can argue that Netflix may be trying run before it can walk.
That said, its established name in this sector may prove to be one of its saving graces. Netflix has a good run on its competitors, having launched a film rental service in 1998, and introducing monthly subscriptions a year later. In 2007, it announced the launch of its video streaming, expanding its international coverage 3 years later. There is no doubting the appeal of Netflix - I for one am an avid user, and look forward to the release of 'The Irishman' later this month. However, the mix of hurdles coming up will seriously test its brand loyalty, so the creative teams within will certainly have their work cut out over the coming year.
Apple TV launches on the first of next month, with Disney not long after on the 12th of November.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.