Netflix
Inc. (NASDAQ:NFLX) reported its
third-quarter earnings recently, beating subscriber growth expectations. The
company added 5.3 million subscribers during the quarter compared to the
consensus of 4.5 million. While Wall Street is fixated on the subscriber
growth, the latest earnings report sheds light on several concerns.
First,
Netflix is evolving into a content company. This puts pressure on the financing
needs as well as margins. Second, entering digital distribution is not very
difficult, which is paving the way for new streaming players. This will result
in content being offered though several platforms, pressurizing Netflix's
distribution moat.
Netflix is an impressive entertainment company that
benefited from its distribution model. As other companies see digital as the
new distribution norm, they will focus on creating in-house streaming services.
Creating an online distribution platform is no longer a barrier to entry given improvements
in technology.
Therefore, Netflix cannot rely on its distribution network
alone. The company is focusing more on content as it can lose its distribution
domination. High content costs will put pressure on Netflix’s financing needs
as well as on its margins.
Since the valuation is already high, the bottom line
is Netflix should be viewed as a content creator with independent distribution,
rather than a streaming player with a distribution moat. Investors should
embrace the changing dynamic and stay on the sidelines for now.
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