Thursday , August 18 2022

Netflix: Once Short Opportunity in Generation – Netflix, Inc.. (NASDAQ: NFLX)


Who would have thought that irresponsible one man would lead to a revolution in the way all video media are used? Well, that's exactly what happened in 1997 when Reed Hastings, the founder of Netflix in the future (NASDAQ: NFLX), continued to return his late borrowed films to the shop and wanted to find solution to my problem: use the mail to rent movies. A little more than two decades has moved on quickly and its solution to this problem has changed the landscape for the media.

Although this type of technology is revolutionary, it is easy to replicate from competitors. Netflix was smart enough to realize that this producer could duplicate this product. As a result, Netflix began investing in its own content 6 years ago, knowing that its business partners, who once provided Netflix content, would draw their content and start their own streaming platform. Netflix noticed this prediction; however, Netflix may not even have predicted how much competition would happen. Multiple companies, including Disney (NYSE: DIS), have already taken some content from the Netflix platform, while many other companies are expected to follow. To maintain sufficient content on its platform, Netflix has accelerated expenditure to develop its own content, which has just accelerated its cash burn over the last year.


This leaves Netflix in a situation where losing valuable content, winning a competition, and burning cash, while testing is needed for investors, it can continue to earn subscribers at a high rate. Due to the increasing competition and poor position of Netflix to adjust to this competition, I think that Netflix becomes an attractive short opportunity as it approaches to highlights all the time.

Love Netflix Users does not include Netflix

Netflix is ​​a great platform for content distribution; however there is a lot of Netflix's most valuable content, not good, in Netflix's. In 2017, the research company 7Park Data found that more than 80% of Netflix streams were for licensed content. In fact, Netflix does not own 3 of the 4 most popular shows, but Netflix pays the company that owns the content to put it on its platform. Although this model has worked very well for Netflix in the past, it now puts Netflix in a holding position 22.


When a content company like Disney is able to get extra revenue by giving Netflix the right to its content, it works well for both. For the content company, we have revenue that would not otherwise have been obtained. For Netflix, we gain valuable content that it can make money from. It sounds like a win-win situation. However, when content companies start their own streaming platform, the content becomes more valuable to them. Content companies with their own streaming platforms would benefit greatly from having exclusive content to their platform as it would help to attract customers. As a result, companies now have an incentive to give Netflix the right to flow their content.

This is where the position catches 22 in. Since the companies have a good reason for removing their content, Netflix has to pay, or endanger the loss of content that is an integral part of its platform. For example, Friends are the third most popular program on all of Netflix; however AT&T (NYSE: T) owns the famous TV show following the acquisition of Time Warner. AT&T is creating its own streaming platform which is estimated to be launched in the coming months. As a result, AT&T has a good reason to keep the popular show itself as having it available on its own platform is likely to attract subscribers to its own platform. This is the reason why Netflix had to pay $ 100 million to keep Friends for 2019, compared to the $ 30 million it paid a year ago. In essence, Netflix knows that this content is needed for their service and the producers have a good reason for not offering the Netflix service. As a result, Netflix will have to pay much higher prices for its licensed content or lose it and the subscribers will follow.

Competitors are Ready for War

Netflix has proved that there is a huge market for video streaming services, but the growth potential of the industry is great and content companies have taken notice. The list of content companies coming out with their own streaming platform is quite extensive, depriving Netflix of the monopoly that he had at one time. This change in the market will reduce pricing power and a share of the market.


First, increased competition will lead to a reduction in pricing power as higher prices will cause many consumers to go to services that compete. For example, Hulu reduced its most popular design by 25% to just $ 5.99 per month. In addition, Bob Iger from Disney went directly to his price war with Netflix by saying “I can say that our Disney side plan to value this is significantly lower than Netflix.” However, what did Netflix respond to more competition offering lower Prices? Well, the company increased prices of all its subscriptions, with the most popular scheme increasing in price by over 18%, which is exactly the opposite of what Netflix would do to avoid losing a share of & # 39 market.

Pricing: Why Valflix should be more valuable as Disney

As I would unfairly value Netflix on a P / E basis due to negative gains, I will use the most common metric used to appreciate a company like Netflix, P / S (Price to Sales). At present, Netflix has a P / S ratio of over 10. I think this ratio is very high, especially when compared to those of existing competitors and in the future. For this comparison, I will focus on Disney, likely to be Netflix's biggest competitor in space.

Disney currently has a P / S ratio of just under 3. Disney is a content creator. Netflix is ​​a content creator. Currently Disney has ESPN + streaming platforms and Hulu's content distribution with the intention of adding Disney + to their arsenal in the coming months. Netflix currently has a streaming platform to distribute content. My point is, the capabilities of both companies are quite similar; however, there are two differences that can set them apart. Firstly, Disney is better placed to make content beyond streaming with goods parks and texts. Second, Disney has multiple decades of content that is already in her arsenal, while Netflix began to create content six years ago. For these reasons, I think on a P / S ratio, Netflix is ​​inherently overvalued compared to its competitors, like Disney.

If Netflix were valued at the same P / S ratio as Disney, its valuation would be staggering. Based on the type, (2.743 / 10.42 = .263; .263 x 360.66) = $ 94.85), if Netflix had the same price multiplier to sell with Disney, Netflix (as I wrote This article is currently worth less than $ 95. As a result, based on this key metric of prices to sales, Netflix is ​​overstated by over 380 percent ($ 360.66 / $ 94.85).

Risks and Mitigators

One big reason that people think Netflix will be able to maintain these things is is that this is the first company to enter the space, also known as an advantage to; r first. However, there is little brand loyalty in this space. Ultimately, people choose which platform provides the best content for the lowest price.

Opposition to one of my main points is that watching Netflix's original programs is increasing. Netflix becomes less reliant, and, at some point, will rely little, if any, on leasehold content. This is already true, over the last few years, since the content of Marvel Netflix's content has not increased its share of viewers. However, there are two main issues with this thesis. First, although increasing at a decent rate, if large competitors pulled all their content from Netflix, the content available on Netflix would decrease dramatically, especially since many of Netflix's most popular shows could be be part of what is being removed. Secondly, it's hard to say how much of this increase people are switching to original Netflix content just because more people have produced or changed people to original Netflix content because Leased content is removed from the service. For example, if all the leased content was removed from Netflix, the original Netflix content portion that was used would go to 100% as there would be nothing else for it. watch.


Third risk to Netflix's shortage is the idea that consumers may be customers to multiple services. At present, average American users subscribe to three video streaming services, suggesting there is room for multiple players in the field. However, because of the large number of streaming services available or planning to launch, I think Netflix will not, over time, be seen as a “top three” choice by users. For example, Disney plans to have three stand-alone streaming services (Disney +, Hulu, ESPN).


Many are going to play over the next few years as many content companies join the growing field of competitors in the video streaming business. This idea is briefly basic and will start playing out in the next few months. As more companies start launching more video streaming options, Netflix will show a weakness in the number of subscribers relatively quickly as consumers learn about alternatives. This will lead the market to focus on other pricing metrics, such as P / S, which will cause a Netflix devaluation price.

Based on Netflix's dependency on leased content as well as increased competition from companies that have succeeded in creating content for decades, I think Netflix is ​​the underdog in the area. However, the extreme market valuation of the company suggests that this is the clear favorite, which is not the case.

Disclosure: I / we are long NQ. I wrote this article myself, and I express my own opinion. I am not receiving compensation for it (other than Search for Alpha). I have no business relationship with any company whose stock has been mentioned in this article.

Additional disclosure: I don't / have no jobs at Netflix, but we can start a short job at Netflix over the next 72 hours.

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