Netflix’s NFLX escalating marketing cost has been a major concern for investors. The company has been looking for ways to lower its marketing expenses, including acquisitions.
Netflix is now reportedly bidding for Regency Outdoor Advertising, a company that owns billboards across Los Angeles. Per Reuters, the company is ready to spend $300 million for Regency. The acquisition is likely to aid the company save significant marketing costs in the long run.
The company spent $1.28 billion on marketing expenses in 2017, which surged almost 29% over 2016. The expense line is now anticipated to surge more than 50% year over year to $2 billion, slightly faster than revenues in 2018.
The higher expense is likely to dent Netflix’s profitability amid increasing competition in the streaming market.
Netflix, Inc. Price and Consensus
Netflix, Inc. Price and Consensus | Netflix, Inc. Quote
Rising Content Cost Hurts Free Cash Flow
Netflix continues to dominate the streaming market based on its ever-expanding content portfolio, well-supported by a whopping budget. The company is expected to spend a $7.5-$8 billion in 2018, which is anticipated to increase further to $12.2 billion in 2020.
The solid budget helps the company fight intensifying competition in the streaming market from the likes of Apple AAPL, HBO, Amazon Prime, Comcast and Walt Disney DIS.
Apple’s aggressive bidding for original content has intensified competition in the streaming market. The iPhone maker is reportedly spending more than its stipulated budget of $1 billion, backed by its solid cash balance of $285.1 billion as of Dec 30, 2017.
Further, Disney’s acquisition of certain Twenty-First Century Fox assets strengthens its over-the-top streaming service, which is tentatively set to launch in 2019. The company boasts a strong cash balance of $4.68 billion.
Moreover, the recently announced streaming bundle offering for $12.99 a month from Spotify SPOT and Hulu intensifies competition for Netflix, which is consuming cash rapidly to expand content portfolio. The company had a cash balance of $2.82 billion as of Dec 31, 2017.
Moreover, Netflix reported free cash outflow of $2.02 billion in 2017, as compared with $1.66 billion in 2016. Management projects free cash outflow between $3 billion and $4 billion for 2018, primarily due to higher investments on acquiring original content.
Growing International Subscriber Base: Key Catalyst
Netflix’s expanding original content portfolio and improving penetration in international markets were the key catalysts behind its strong performance last year. Subscribers in the International Streaming segment increased 41.6% year over year to 62.83 million. Paid members were 57.83 million, up 40.4%.
Netflix has been progressing really well in India, Southeast Asia and Japan. The company recently strengthened its push in the global video streaming market with its first Philippine series.
Notably, Netflix intends to produce/acquire 80 films throughout 2018. The company plans to release 30 international original series this year, including programs from France, Poland, India, Korea and Japan.
Currently, Netflix carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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