Narcos, House of Card, The Crown, 13 Reasons why..
These are a few series I know people watch and YES they are on NETFLIX. Though enthusiasts say that it is beating the cable TV or the satellite Connection one have in their home is getting replenished with NETFLIX. But, I am quite skeptical not because of the hyper optimism but because of the ground realities. But let's have a look at the business model of NETFLIX.
Now the kind of content one has on Netflix is quite huge, one moment you can watch a baby show, other moment you can watch a documentary. We have to agree that the content delivery is best as per the standards where if you compare the Amazon Prime its bad.. its all time bad.. So the business model first part is quite agreeable that it has a strong base.
But what we see is that Netflix is quite Young Blood kind of oriented company. All the series, documentaries that are present in it are quite English Speaking Youth Centric which is totally good at its place, but if it has to succeed in India/other parts of the world it has to get out of those shackles and move beyond. This i will call as Content Risk (CR)
As Netflix is totally based on Internet and still there are places around the world where Internet speed is just a joke(including India) i will say this is the Delivery Risk (DR).
Looking at the Netflix monthly rental plans for single screens is $7.99 subsequent to approx Rs 520-530 is somewhat near to the Indian standards, but their are some problems with it. So we can safely assume that this unique feature of having a single screen is actually a risk which Netflix has. I will assume this risk as User Risk (UR).
Lets sum up these risk and come at Total Risk (TR) = CR+DR+UR
Now we can safely put Netflix into the category of an Entertainment company and the famous Goliaths in the Entertainment Industry with whom we can compare it are as follows :
- COM CAST
- TIME WARNER
- DISH NETWORK
(I am not taking Hulu which is in the same domain as Netflix as it is not publicly traded and data cannot be found, though one piece of information is that Netflix comprises 36.5% of USA streaming and Hulu just 6.5% so let's safely assume that Hulu is still at a nascent stage and we leave it for sometime later to talk about)
For our Analysis we will take these companies and compare how the scenario has been in the last 3 years for all the 7 companies.
Lets look at the revenue
Its kind of scary to see that Netflix stands no where in this league of giants. But let me provide you some data (all data in millions of USD)
Now this seems satisfying to us that Netflix had a revenue of $8.8 billion in 2016 which can be expected to be somewhere between $9-$10 billion in 2017, but one huge problem with the firm has been its huge cost of revenue (COGS simply). Looking at this data we find that most of the time the cost of revenue accounts between 60-70% of the revenue which is quite a problem in long run. This has to come down to at least 40-50% which i believe can be achieved with the help of the sound strategy aligned with the realistic goals.
Now lets have a look at the Net income of these 7 companies:
Again what we see is the presence of the Netflix is insignificant in the comparison to the giants of the industry.
But looking at the individual data it might be helpful( all the data in million USD)
What happened in 2015 was that in order to ensure a better experience of the customers at Netflix, the company spent a huge sum of money on the Research and Development work which has made the streaming services unmatchable. Most of the Internet based companies have the huge cost of running the servers so is the case with Netflix. One interesting point with the Netflix is that the amount that it invests in the content creation is such an asset which will not get depreciated with time and can be used time and again for the revenue generation purposes.
Some interesting facts about the investments by Netflix is that in 2016 it released its 126 original series for which they had invested this amount in past years. Netflix pays upfront and asks for 2 seasons of the series made ready in the allocated time.
Now let's have a global perspective of the company
source : worldwide expansion in 2015
now this data is quite old but let me put refreshing number of subscribers and tell you that total subscribers are more than 100 million worldwide. This is a healthy number and it shows that in subscription side the company is growing at a huge rate of 15-20 % per annum. But a good news is still Netflix is not in china, and last year in April 2017 Netflix signed a deal with third party streaming service in china and they would be available there soon. So when China comes into play these revenue is again going to get boosted. What we see here is a company which is penetrating the world at a very fast rate and all thanks to Internet.
Talking about the companies debt we see that it has got increased from $914 million to $3393 million, this is huge but what we observe here is at the very stage which the Netflix is the Debt is bound to increase as the money they are getting from equity is huge but to finance themselves they need to have a much broader base of money. This business model requires them to have huge finances so that they can invest in content creation and upgrade the servers from time to time.
Talking about the stock price let's have a look in the last one year
The prices have moved from $125 per share to $205 per share as today, and volatility overall has been low because the people are holding the shares in large amount. 85% of its share are held by institutional investors like blacrock, vanguard and they have invested in the stock to hold as their trading are huge and consider this as a diversifed part of their portfolio. This indicates that it is a stock worthy of picking it up in your portfolio. It's Beta is 0.7 and this also shows that stock is less volatile as compared to market, more specificaly S&P500.
Last but not the least i will say, if company is able to reduce the Total Risk mentioned above and able to reduce its debt in the upcoming terms and hopefully gets on the wagon in China, then it is going to be a beautiful stock that you won't regret buying. Internet penetration is one of the biggest movers of its stock price. As more and more people are coming under the umbrella of Internet, it is expected that the company will perform better than what it is today.