Should Netflix Worry About a Resurgence in Torrenting?
Netflix Inc. (NASDAQ:NFLX) is the leading player in the subscription-based video streaming market. The company now operates in more than 190 countries globally and has amassed over 190 million subscribers. As such, its market value has surged to over $200 billion.
However, the California-based home entertainment giant could soon begin to experience a slowdown in subscription growth compared to performance over the last seven years. In the company's most recent quarterly results, Netflix missed earnings estimates. It cited slowed growth due to the novel coronavirus as a short-term challenge, but this is not the only obstacle that Netflix faces going into the second half of the year and beyond. Competition is growing from all angles.
Traditional cable service providers have started to claim a share of the video streaming market after launching their own services, especially in North America. In addition, more pure-play subscription-based services continue to crop up. The battle now is no longer between Netflix, Walt Disney Co.'s (NYSE:DIS) Hulu and Amazon.com Inc.'s (NASDAQ:AMZN) Prime Video. It's getting more complicated than that. There are also the peer-to-peer video sharing platforms, which after a considerable period of declines are beginning to witness a surge in demand. These provide an interesting alternative in some markets where content piracy is still high.
For instance, the world's largest peer-to-peer video-sharing company, BitTorrent, has continued to grow despite a significant shift toward subscription-based video streaming platforms. The company, which offers products across two brands, BitTorrent and uTorrent, just announced that it crossed 2 billion software installations this month. It has benefited from the increasing appetite for decentralized platforms.
BitTorrent is now looking forward to expanding its product offering by adding decentralized file storage and live video streaming. "We look forward to fulfilling our mission of improving the protocol and introducing new use cases, such as decentralized file storage and live streaming products," CEO Justin Sun said in a press release on Tuesday.
Torrenting could be a problem for Netflix, especially given the fact most of its growth in the most recent quarter came from global markets. In the second quarter, Netflix registered 6.4 million net subscriber additions in North America and 35 million from international markets. While the company appears to have remarkably dealt with content piracy in recent years, some of its addressable markets at the international level remain at high risk. The downside to this is that they still offer the best potential for growth.
As such, a surge in the popularity of torrenting platforms poses a market risk for Netflix and its peers.
Shares of Netflix have plunged more than 10% since the release of its second-quarter results last month. Its stock now trades at a trailing 12-month price-earnings ratio of about 79.41, which is considerably high for a pure-play video streaming stock. In comparison, Amazon (NASDAQ:AMZN), which has a well-diversified portfolio, trades at a price-earnings ratio of 119 while most of the other technology giants trade at even lower valuation multiples.
Netflix's PEG ratio, which factors estimated earnings for the next five years, prices the stock at 2.90. Amazon's PEG ratio is 2.22. Clearly, both companies have strong growth ambitions. However, while Amazon has a well-diversified portfolio, Netflix's growth prospects rely on subscriber growth. This could be an issue given the resurgence of torrenting platforms like BitTorrent.
Some analysts have also attributed the resurgence of torrenting to the fragmentation of the video streaming market. As noted earlier, Netflix is no longer the only dominant player. Others, including Prime Video and Hulu, now have their share.
Torrenting platforms like BitTorrent provide users with a wide variety of content to choose from, unlike subscribing to Hulu, Netflix and Prime Video. This is becoming a concern in the industry. However, if Netflix and its peers can replicate their success against piracy in North America to the rest of the world, then there will not be much to worry about.
Disclosure: No positions in the stocks mentioned.
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This article first appeared on GuruFocus.
