Video streaming giant Netflix reported a 34% increase in revenue for the third quarter (Q3), while net profit grew 210%. The company's shares jumped on the day it reported its figures, with net subscriber growth beating analysts’ expectations. Those expectations had been damped by the Q2 growth figures, which had fallen short of what was expected.
Netflix reported a net addition of 6.96 million subscribers over Q3, bringing the group’s total membership to a staggering 137.1 million accounts. Netflix is expecting a total net addition of 9.4 million subscribers in Q4, of which 7.6 million are expected to be paying subscribers.
Cash flow and content
The company reported a free cash flow deficit of $859 million for Q3, compared with a deficit of $465 million a year earlier. The negative cash flow is largely because of content funding throughout the production phase.
Netflix deems the investment in original content production as very necessary and expects it to produce high returns and shareholder value in the long run. It thinks content secures viewers and keeps them within its ecosystem. Netflix’s investment in content now means production in 80 countries. The quality of the content is recognised not only by the fast-growing subscriber base, but also the high acclaim realised from an impressive 112 Emmy nominations in 2018. This was the most Emmy award nominations for 2018.
YouTube, Disney, Amazon and Apple (to name a few) are all investing within the internet entertainment services space. Disney and Amazon will be launching their new streaming offerings late in 2019 and will both pose a threat in the online entertainment space. Disney already has a very strong content offering, while Amazon has a far reach and is securing the rights to several top sporting events (including football).
Netflix does however have a first-move advantage in the subscription-based online video streaming industry. The group is growing its market share in the US (with more than one million net subscriber additions in Q3 2018) and internationally (nearly six million net subscriber additions in the same quarter). The subscriber growth across the US and the rest of the world shows the increasing adoption of online on-demand streaming and the move away from scheduled entertainment. The scope of the industry remains enormous and we believe that there is enough room for competitors to co-exist profitably. Consumer demand for the product is high with increased accessibility, better data mobility and connectivity further helping feed the appetite for streaming entertainment across the world.
Netflix trades on a price-to-earnings (PE) ratio of around 128 times, which is expensive, but is now just over a third of the PE premium in December 2016, which was at 346 times. The earnings growth is expected to see the PE reduced to less than 60 by 2020.
Netflix does not yet pay a dividend and free cash flow is negative. As discussed earlier, it should be considered that the company is making significant investments in content production, which it hopes will result in high returns and further shareholder value in the long run.
Netflix: the technical view