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Netflix: A Unique Opportunity – Netflix, Inc. (NASDAQ: NFLX)

Who would have thought that the irresponsibility of a man would lead to a revolution in dealing with all video media? Well, that's what happened in 1997 when Reed Hastings, the future founder of Netflix (NASDAQ: NFLX), continued to return his lent films to the store late for a solution to his problem: using the mail to rent movies. Just over two decades forward and his solution to this problem has really changed the landscape for media consumption.

Although this type of technology was revolutionary, it can easily be copied by competitors. Netflix was smart enough to realize that this product could be duplicated by content producers. That's why, six years ago, Netflix invested in its own content and knew that its business partners, who once provided Netflix content, would retrieve their content and launch their own streaming platform. Netflix was right about this prediction; However, Netflix might not even have predicted how big the competition would be. Several companies, including Disney (NYSE: DIS), have already removed some content from the Netflix platform, while many others are expected to follow. In order to maintain sufficient content on its platform, Netflix has accelerated spending on developing its own content, which has led to a higher cash burn over the last year.


Netflix loses value Content to win the competition and burn cash, investors must continue to demonstrate, but they can continue to attract subscribers at a high rate. Given Netflix's increasing competition and poor positioning to adapt to this competition, I believe Netflix will become an attractive short opportunity as it reaches all-time highs.

Netflix users love non-Netflix content

Netflix is ​​a great platform for content distribution; However, many of Netflix's most valuable content is not Netflix's. In 2017, research firm 7Park Data found that more than 80% of Netflix streams were licensed content. In fact, 3 of the 4 most watched shows are not owned by Netflix, but Netflix pays the company that owns the content to put it on its platform. Although this model has worked quite well for Netflix in the past, Netflix is ​​now in a situation where it has to do with 22.


When a content company like Disney can generate additional revenue when Netflix grants the streaming right, its content works well for both. For the content company, it generates revenue that otherwise would not have existed. For Netflix, it gains valuable content that can be used to make money. Sounds like a win-win situation. But if content companies launch their own streaming platform, the content becomes more valuable to them. Content companies with their own streaming platforms would benefit greatly from exclusive content for their platform as it attracts customers. As a result, content companies now have an incentive to stop giving Netflix the right to stream their content.

This is where the situation of catch 22 comes into play. Now that content companies have a good reason to get their content, Netflix either has to pay or risk losing the content that is part of their platform. For example, Friends is the third most popular program on Netflix. However, the famous TV show is owned by AT & T (NYSE: T) after the acquisition of Time Warner. AT & T is creating its own streaming platform, which is expected to hit the market in the coming months. Therefore, AT & T has a good reason to keep the popular show to itself because it would only be available on its own platform and would likely pull subscribers onto their own platform. Because of this, Netflix had to pay $ 100 million to keep Friends for 2019, compared to $ 30 million paid a year ago. In essence, Netflix knows that this content is needed for its service, and content producers now have a good reason not to offer Netflix the service. As a result, Netflix will be forced to pay much higher prices for its licensed content or lose it and the subscribers that follow.

Competitors Are Ready for War

Netflix has proven that not only is there a huge market for video streaming services, but the growth potential for the industry is great, and companies have drawn attention to it. The list of content companies publishing their own streaming platform is quite extensive and robs Netflix of its former monopoly. This market shift will reduce price power and market share.


First, increased competition leads to a decline in price power, as higher prices only lead to many consumers claiming competing services. For example, Hulu has lowered the price of its most popular plan by 25% to just $ 5.99 a month. In addition, Disney's Bob Iger directly addressed his pricing battle with Netflix and said, "I can say that our Disney-side plan is to set the price much lower than Netflix's." What did Netflix do in response? heightened competition Lower prices: Well, the company raised the prices of all of its subscriptions, with the most popular plan rising more than 18% – just the opposite of Netflix, so as not to lose market share.

Rating: Why Netflix should be rated more like Disney

Since it would be unfavorable to rate Netflix based on the P / E due to the negative outcome, I will use the most common metric to get a company such as Netflix and P / S (Price to Sales): Currently, Netflix has a P / S ratio of over 10. I believe that this ratio is astronomically high, especially compared to some of its current and future competitors. For this comparison, I'll focus on Disney, probably Netflix's big Gest competitor in the room.

Disney now has a P / S ratio of just under 3. Disney is a content creator. Netflix is ​​a content creator. Disney currently has the ESPN + and Hulu streaming platforms for content distribution with the intent to add Disney + to its arsenal in the coming months. Netflix currently has a streaming content distribution platform. My point is, the capabilities of both companies are pretty similar. However, there are two differences that can differentiate them. First, Disney is in a better position to monetize its content beyond streaming with merchandise and theme parks. Second, Disney has been offering content for several decades, while Netflix began creating content just six years ago. For these reasons, I believe Netflix is ​​inherently overvalued in terms of P / S ratio compared to its competitors like Disney.

If Netflix rated the same P / S ratio as Disney, his rating would be shockingly lower. According to math (2.743 / 10.42 = .263; .263 x 360.66) = $ 94.85), if Netflix received the same price-to-revenue ratio as Disney, Netflix (as I'm writing this article now) would be worth less than a $ 95. Based on this key value-for-money ratio, Netflix is ​​overvalued by more than 380 percent ($ 360.66 / $ 94.85).

Risks and Mitigations

One major reason that Netflix will be able to sustain these emerging headwinds was that it was the first company to come into the room, also known as a first-mover advantage. However, there is little brand loyalty in this area. In the end, people will choose which platform offers the best content for the lowest price.

A counter-argument to one of my main arguments is that Netflix's original program is increasing. Netflix becomes less dependent and relies, if at all, on leased content. This has already been the case in recent years as the original content of Non-Marvel Netflix has increased its share of viewers. However, there are two main problems with this thesis. First, Netflix's available content would decrease dramatically if large competitors were to divest all their content from Netflix if they grew at a decent pace, as many of Netflix's most popular shows could be part of the planned offering. Second, it's hard to say how much of this increase will only be to people switching to Netflix's original content, as more will be produced or people will be switched to Netflix's original content because rented content is taken out of service. For example, if all rented content is deducted from Netflix, the portion of the original Netflix content that is consumed would be 100%, otherwise nothing would be considered.


A third risk for Netflix is ​​the idea that consumers will potentially be customers of multiple streaming services. So far, the average American consumer subscribes to three video streaming services, suggesting that there is room for several players in the arena. However, due to the large number of streaming services that are available or planned to be launched, I believe that over time Netflix is ​​not considered by consumers as "top three". For example, Disney plans to set up three streaming services (Disney +, Hulu, ESPN).


Over the next few years, a lot will emerge as many content companies enter the growing field of competitors in the video streaming business. This idea is a basic short form that will impact in the coming months. With more and more companies starting to roll out more video streaming alternatives, Netflix will see subscriber numbers weaken relatively quickly as consumers learn of alternatives. This will cause the market to focus on other valuation metrics like P / S, which will lead to a devaluation of Netflix's stock price.

Based on Netflix's reliance on leased content and increasing competition from successful companies I think Netflix has been creating content for decades and is the outsider in the region. However, the extreme valuation of the market for the company implies that it is the clear favorite, which is simply not the case.

Disclosure: I am / we are a long DIS. I wrote this article myself, and it expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.

Additional Information: I have no positions with Netflix, but I can take a short position on Netflix in the next 72 hours. 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