Netflix NFLX has been the best-performing FAANG stock in 2018, thanks to its impressive content portfolio that is well-supported by a whopping budget. The company is expected to have 1000 originals — movies and television shows — on its streaming platform by the end of this year.
Moreover, Netflix’s focus on investing in original as well as regional content has helped it win accolades and awards this year. The company was recently named as the “Entertainer of the Year” by Associated Press (AP). At Emmys, it tied up with AT&T’s T HBO, winning 23 awards in different categories.
Netflix’s Stranger Things soundtrack recently won a Grammy Award nomination in the "Best Compilation Soundtrack For Visual Media" category. Moreover, the company won eight nominations at the Golden Globe, most among the streaming providers.
Moreover, its recently released Roma has been announced the best movie of the year by the New York Film Critics Circle and won the Golden Lion Award. Roma’s Alfonso Cuaron also won the best director and best cinematography awards for the year.
Netflix’s strong content portfolio is helping it win subscribers rapidly. The company added almost 7 million subscribers in the last reported quarter (third-quarter) and expects to add another 9.4 million in fourth-quarter 2018. Paid member addition is expected to increase 15% to 7.6 million.
The aforesaid factors have been major growth drivers for Netflix shares that have returned 33.1% year to date, against 7.6% decline of the S&P 500 Composite.
Here we discuss four factors that should be taken into account while considering investment in Netflix for 2019.
Expanding Original Content & Movie Slate
Netflix’s Roma leads the Oscar nomination list for Best Foreign Language Film. Notably, the company won first feature-film Oscar for documentary Icarus in 2018. The success of Roma surely validates the company’s evolution as a major movie studio, which is helping it attract major Hollywood talents.
The company is currently working or set to work with a number of renowned Hollywood directors, including Martin Scorsese, Steven Soderbergh, Dee Rees, Guillermo del Toro, Noah Baumbach and Michael Bay. Actors involved with the streaming platform include Meryl Streep, Ben Affleck, Eddie Murphy, Sandra Bullock and Dwayne “Rock” Johnson, among others.
Reportedly, Netflix is planning to produce 90 movies a year, out of which 55 will be original films, with budgets ranging from $20 million to $200 million.
Additionally, Hollywood ‘A’ listers like Idris Elba (Turn Up Charlie), Ellen Page (The Umbrella Academy), Renee Zellweger (What/If), Uma Thurman (Chambers), and Christina Applegate (Dead To Me) are set to appear on Netflix in 2019.
Moreover, partnerships with prolific creators like Ryan Murphy, Kenya Barris, Shonda Rhimes, Shawn Levy and Jenji Kohan are noteworthy. Netflix has also signed multi-year production deal with Barack and Michelle Obama. These are providing impetus to the company’s content expansion strategy.
Regional Content to Boost International Footprint
Although China remains elusive to Netflix, the company is expected to benefit from increasing presence in international markets. The company has big plans for India, with the country’s upcoming slate for 2019 including 12 local language original series and 20 local language films.
Netflix has plans to order original shows from Africa in 2019. The streaming giant has already forayed into Nigeria, the world’s second-biggest movie industry by volume, after purchasing worldwide rights to Lionheart.
Netflix is also working on projects across Mexico, Spain, Italy, Germany, Brazil, France, Turkey and the entire Middle East.
Competition Intensifying in the Streaming Space
Notably, 2019 is expected to see intensifying competition in the streaming market. Not only Disney DIS and Apple AAPL but also Sinclair Broadcasting SBGI, Comcast’s CMCSA NBC Universal and AT&T’s WarnerMedia are expected to enter this rapidly growing field next year.
Budgets are also expected to increase manifold. AT&T is expected to invest more on HBO and WarnerMedia. Both Amazon Prime Video and Hulu are anticipated to increase their budget to fight upcoming competition.
Netflix is expected to reach $13 billion in gross content spending in 2018 (more than $8 billion on new content), which is likely to increase in 2019. On the other hand, Apple is estimated to spend $1 billion in 2018, which is expected to hit $4.2 billion by 2022.
Notably, the combined expenditure from Disney and Comcast, post their respective acquisition of 21st Century Fox and Sky, is expected to reach $43 billion by the end of 2018, per Ampere report. The budget is likely to increase in 2019.
High Debt Level a Concern, Cash Burn to Continue
Netflix is a highly leveraged company. As of Sep 30, 2018, long-term debt was $8.34 billion. Debt-equity ratio was 166.4%, much higher than the S&P 500 Composite’s 82.2%. Notably, in October, the company raised roughly $2 billion in financing through debt securities.
Further, streaming content obligations were $18.6 billion at the end of the third quarter.
Moreover, this Zacks Rank #3 stock continues to burn cash. In the third quarter, free cash outflow was $859 million compared with $465 million in the year-ago quarter. For 2018, the company continues to expect free cash outflow of $3-$4 billion.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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