Netflix shares have hit a new all time high, is it a bubble or still a good investment?
Netflix shares surge again, have they peaked?
If you had invested £1,000 in Netflix five years ago those shares would now be worth £5,300.
If you had bought shares in 2002 when the company had its IPO you would have increased your money 350 fold. If you had invested £3,000 at that point, then the money would now be worth over a million quid.
It’s been quite the ride.
But here is perhaps the most interesting stat, shares are up a third this year. Netflix now has a market cap of $187bn. As John Authers pointed out on Bloomberg, it is now more valuable than Cisco and Exxon Mobil, two companies that were once the biggest in the world.
The P/E ratio is 110 — according to my thesaurus a good word to describe that ratio is whopping. Some might say ridiculous.
The market cap is also just over nine times 2019 revenue.
The massive valuation aside, there are three major concerns:
- Debt levels — at the end of last year, net debts stood at $14.8bn. Debts at the company have increased six-fold since 2015.
- Content stream may dry up as the company will struggle to make new content during the lockdown.
- Competition from the likes of Disney and Amazon.
For Netflix, content is what matters. It sounds like a cliche, but content really is king.
And I’ll let you into a secret, I have just taken out a Disney Plus (+) subscription. I must say, it seems to me that Netflix wins hands down.
Actually, the Disney Plus (+) subscription decision was a bit of a no brainer. I can get it for £3.99 a month as part of my O2 package. As I have just paid off my iPhone and moved to a cheaper tariff, I expect my O2 monthly bill to be £35 a month cheaper, so an extra four pounds a month wasn’t a difficult decision.
But, if you look beyond the Star Wars and Marvel content, and the traditional Disney content, there isn’t much left. There is very little content on Disney Plus (+) that interests me which I haven’t seen before. The most noticeable exception to that is the new Star Wars series, the Mandalorian. I am looking forward to watching that. But there is a limit to how much Star Wars and Marvel content you can watch. I like both franchises, but you need variety.
When I compare that with Netflix, I think that Disney Plus (+) is decidedly second best.
There is another point. These subscription services are cheap. Do you remember when we used to get videos from a video library? It used to cost £3.99 to rent a movie for one night. Sometimes we got out two or even three videos at a time. And that was 20 years ago.
You can subscribe to Netflix, Disney Plus (+), and Amazon Prime for less money a month than two people going to the cinema, (when there is no lockdown) or less money than a couple of nights in watching VHS videos 20 years ago.
I would say that from a customer satisfaction point of view, Netflix is great value.
Okay terrestrial TV is sort of free, and I do think that in terms of content, the BBC has raised its game — I am looking forward to watching the latest season of Killing Eve. I am not so sure that ITV has raised its game — if you don’t like soaps and Simon Cowell it doesn’t have much new content to offer.
Obviously, Netfix is benefiting from the lockdown. I guess another danger is that by the end of the lockdown people will be bored with it.
I am not so sure. Last year, I was travelling into London by train most days, and I used to download Netflix shows and watch them on the train journey back. Providing I could get a seat, travelling by train became quite pleasurable.
I think these subscription services are here to stay.
Sure Netflix has high debts — but the money raised is to fund new content and expansion.
I don’t think we are near peak profits for Netflix yet. Of course, a lot of this potential is priced into the share price but content can have value beyond attracting paying customers.
Good content, can create additional revenue streams — potential for merchandising, theme parks, books, movie releases, video games.
Netflix hasn’t quite managed a Game of Thrones, Star Trek or even Doctor Who blockbuster yet, but I think this is a function of the short period of time it has been creating content. Content like that has spin-off value.
Later this decade new mediums will emerge — virtual and augmented reality will create a huge new opportunity.
There is no guarantee that Netflix will grab this opportunity, but then there is no such thing as guarantees in the world of investing.
But I don’t think we are at peak Netflix share price, yet.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees