Is Netflix now a bargain?

The latest results were impressive. Growth seems set to continue. And the share price bombed. Is Netflix now a bargain?

Article updated: 18 December 2018 10:00am Author: Michael Baxter

I’ll give you two reasons why I expect Netflix to carry on bringing in new users. Two reasons that I find pretty exciting.

And then I’ll give you an even bigger reason.

There is one nagging doubt, but an interesting fix.

Two reasons

I am a great believer in the principle of ascertaining how good a company is by how much you like it. If, as a customer, you think it provides a great product, then that is also a big tick in the ‘is it a good investment?’ box.

And I am a subscriber. It’s not an expensive purchase.

But I am a fan of historical fiction — and the further back in history it goes, the more I tend to like it. I am a big fan of a series of books by Bernard Cornwall called The Last Kingdom, set in England during the reign of King Alfred. When the books made it to TV, I was excited. The BBC created seasons one and two and they were good, maybe really good. But the BEEB was struggling to make it sufficiently popular to justify the cost and chose not to continue with the series. So, Netfix took it on. How good was Season Three, the first Netflix season? Answer; superb — I thought Netfix catapulted the show into a different league.

As far as I am concerned, Netflix passed a big test.

My second reason is Dracula. Netfix is teaming up with the BBC to create a new TV series based on everyone’s favourite vampire. But the show is being written by and produced by the outstanding Steve Moffat — of Doctor Who and Sherlock fame.

I confidently predict that the mix of Moffat, BBC, Netflix and Dracula will create a massive hit and another compelling reason to sign-up to Netflix.

The bigger reason

But exciting, though, I find the above shows, they pale into insignificance compared to the big opportunity of the sub continent. Yes, I am talking India; Netflix is throwing a lot of money at creating Hindi content — this is an extraordinary opportunity.

Fear and opportunity

The big worry with Netfix is the PE ratio. In the first nine months of its current year, net income has been $1.07 billion. But market cap is $114 billion.

That’s quite the valuation.

And yet that valuation relates to the company after its share price has collapsed — from $418 in July to $263 as I write. It has seen a massive sell-off and still the PE is sky high.

The opportunity

Do I think Netflix will carry on growing, despite competition from the likes of Amazon, Disney and maybe in the near future? Apple? Yes I do, because it is has become outstanding at creating superb content and thus will drive growth.

Can it ever grow to a level that will justify the current valuation?

It is possible the Indian opportunity alone can achieve this for Netflix. But the company does have a challenge. Across the Anglo Saxon world it is getting close to market saturation and I worry that to expand globally at the rate the current share price demands, it needs to create too much localised content, and that is a tough call.

But there is another reason to be bullish.

At the moment, it has 137 million paying customers worldwide. If it could persuade ten per cent of those customers to fork out $10 a month more money, revenue would increase $1.3 billion.

I think Netflix has an opportunity to up-sell, to increase revenue that way, in addition to expanding the user numbers.

And technologies such as virtual and augmented reality could provide Netflix with an unprecedented opportunity to up-sell, but maybe not for three or four years.

I am not sure that the markets have grasped this opportunity.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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