At this point, Netflix (NASDAQ:NFLX) is the most popular streaming service on planet earth.
Part of daily life for millions, its original shows like sci-fi horror drama Stranger Things and fantasy series The Witcher have amassed huge followings and become cultural icons in their own right.
But with competition from giants like Amazon (NASDAQ: AMZN) and Walt Disney (NYSE: DIS), will it keep the top spot?
Founded in California in 1997 by duo Marc Randolph and Reed Hastings, Netlfix started life as an online DVD rental offering.
As technology moved on, the firm evolved into the online streaming behemoth we know today.
With the Covid-19 pandemic, and so many of us stuck indoors looking for something to watch, Netflix has grown ever-more popular.
However, other companies have started vying for their own slice of the streaming market. Competition is growing more and more fierce each day.
As a result, investors are asking if the firm is a good investment and if this is the right time to buy Netflix stock.
Fundamentals of Netflix stock
Netflix saw unprecedented 2020 membership growth due to the Covid-19 pandemic, contributing to impressive first quarter revenue in 2021. The figure hit $7.2 billion, up 24% from $5.8 billion the year before and from $6.6 billion in the fourth quarter of 2020.
The trend is set to continue, with the company forecasting second quarter revenue of $7.3 billion.
Global streaming paid memberships hit 207.6 million in the first quarter of 2021, versus 203.7 million in the fourth quarter and 182.9 million year-on-year.
However, the figure was still below guidance for 210 million paid memberships in the quarter. The firm now forecasts it will hit 208.6 million in the second quarter. This would still be less than originally forecast for the first.
Netflix attributes the now-slowing membership growth to the pandemic, which impacted production and resulted in a lighter content slate for the first quarter.
However, as production levels were still ramping up in late 2020, content spend was still lower in the first quarter. This caused the operating margin to hit an all-time high of 27%.
Plus, average revenue per membership rose 6% year over year in the first quarter. Operating income more than doubled to $2 billion from $958 million. This beat Netflix’s own guidance.
The company’s shares were trading at $536 at time of writing, up 64% from $326 at the start of 2020. It has a a $237.5 billion market capitalisation.
The price-to-earnings ratio, calculated by dividing the share price by earnings per share, is 64.84x. The firm’s price-to-sales ratio, determined by dividing the share price by sales per share, is 9.24x.
What is the bull case for Netflix?
Netflix has plenty going for it. As one of the FAANG stocks – an acronym for Facebook (NASDAQ: FB), Amazon, Apple (NASDAQ: AAPL), Netflix and Google, now Alphabet (NASDAQ:GOOGL) – it has an impressive reputation.
Not only that, but the company makes its own content and has a number of marketable franchises. In fact, a survey from Cowen found that the company’s original content is the biggest draw for subscribers.
Cowen went on to reiterate its Outperform rating on the stock in July. This after Netflix came out on top in the investment bank’s survey asking which streaming service has the best content.
Original content offers protection against competitors like Disney, which have been withdrawing their content from Netflix for their own platforms.
If you are subscribed to Netflix so you can watch the next season of Jane Austen-style period drama Bridgerton, that makes you less likely to care about other content being taken off the site. Those kinds of subscribers will keep paying their monthly fee anyway to find out what happens next.
Furthermore, Netflix’s revenue growth in 2020, 24% to $25.0 billion from $20.2 billion in 2019, is part of a steep trend. Revenue in 2019 had already jumped 28% from $15.8 billion in 2018 and from $11.7 billion in 2017.
Its strong performance in 2020 puts the firm in a good space for growth – perhaps making even more content that could draw in a bigger audience.
What is the bear case for Netflix?
Competition is one of the biggest concerns for Netflix right now as the so-called “streaming wars” rage on.
Amazon Prime already has close to as many subscribers. Although, admittedly, many are subscribed for non-streaming reasons – since Prime membership confers other benefits.
Disney+ is on the rise as well, with 100 million subscribers already despite a much shorter life.
HBO and HBO Max owner WarnerMedia, part of AT&T (NYSE: T), is merging with Discovery. Discovery is a major when it comes to nature, science, and non-fiction titles. The combined company could be a serious Netflix challenger. It would combine the existing CNN, HBO, and Warner Bros offering with Discovery’s Animal Planet and Food Network.
With HBO and HBO Max already boasting 64 million subscribers, this merger could be the thing that sees it snapping at Netflix’s heels.
And it’s not just the worry of direct competition that the company has to worry about but also the dangers of an over-saturated market.
The firm’s popularity stems from offering a large volume of content at a low price. But, if more and more big media organisations start their own services and pull their content from Netflix, this could diminish its offering.
It could even drive people away from these types of streaming services all together. Some might turn to online piracy to access their favourite shows, for example, rather subscribe to the full range of streaming services. Or they might just go back to boring old TV.
The market could even undergo a re-bundling, as separated entities regroup to draw customers back in.
While Netflix is planning to release at least one new original film for every week of 2021, an end to lockdown restrictions could see it competing with movie theatres as well.
Should I invest in Netflix stock?
There are certainly some excellent reasons to invest – popular original content, a large subscriber base, and excellent financial results.
Likewise, there are reasons it might not suit everyone. There’s growing competition, an end to the Netflix-friendly environment of the pandemic, and those lower-than-expected subscriber numbers for the first quarter.
The company’s results and high-profile franchises certainly make it worth considering, in any case. There’s plenty to love about Netflix, but the ongoing streaming wars could definitely put some investors off.