What Does Netflix’s Financial Future Look Like?

I think almost all of us use Netflix (even if we use someone else’s account) pretty often. The company has become so big that the name Netflix has even become a verb in pop culture. It has movies, TV, and its own original programming. Despite all these positives, many are concerned about the future of the company. The company has burned through $13 billion since 2011, while also carrying around a large amount of debt. This leaves us with the question, what does the future of Netflix look like?

There are a few things that are causing investors to raise questions about their confidence in Netflix. The most important issue, in my opinion, is their financial situation. The company has already told investors that it expects to record a negative $3 billion in free cash flow in 2019. This is similar to last year. In an article from Forbes, David Trainer explains part of the issue: “The main reason investors are losing confidence is that Netflix’s subscriber growth has not generated enough revenue growth to cover the increase in content spending.”

This year, Netflix is expected to spend 85% of its $12-13 billion budget on its own original content. This has been one of the most important tasks for the company in the past few years. A lot of companies are starting their own streaming services and don’t want to license out their properties to other streaming services. As of 2018, 63%  of Netflix’s viewing came from licensed content. What makes Netflix appealing is it has both its own content and other content licensed out from other studios. Netflix wants to be able to rely mainly on their own content to keep subscribers content with their product, and this means spending a ton of money on their own properties as well as spending to acquire new ones.

Netflix experienced huge growth from the Q1 to the end of Q2 in 2018. On January 1st of 2018, Netflix’s stock price was $267.66 per share. On June 29th of the same year, their stock was at $391.43 per share. In two-quarters Netflix’s stock was able to grow 123.77%. Why is this? Well, the company decided it wanted to expand to more markets across the globe. According to Netflix, their Spanish-language heist thriller called La Casa de Papel (or Money Heist in English) became the most watched non-English series on Netflix ever.

During this period of time, Netflix began releasing original content that was resonating with fans. Hit show Queer Eye released on February 7th of 2018. Its success was an indicator for the rest of the quarter, as Netflix released more original content that coincided with its stock price continuing to rise.

Netflix’s stock price continued to steadily increase until December 2018. On December 24th, the stock price took a huge hit and a share of Netflix was only $233.88. That’s a pretty dramatic drop on Christmas Eve. Netflix’s stock has risen since then, but there’s still some skepticism about the company’s future.

If Netflix was the only streaming service out there then they’d be in great shape. The issue is that right now is only the beginning of the streampocolypse. So many different media companies are realizing it’s dumb to lease out their own content to a buyer like Netflix when they could have their own streaming service. Disney, CBS, HBO, Apple, and WarnerMedia are all planning on launching their own streaming service, or in the case of CBS, already have.

Disney is going to play a huge role in what happens to Netflix over the next few years. They are going to start removing their content from the platform beginning this fall. Keep in mind, Disney owns a lot. They own Fox, Marvel, Star Wars, ESPN, and National Geographic, just to name a few. Pulling all of this content off of Netflix will have a large impact. It’s estimated that Disney content on Netflix accounted for 8-12% of Netflix viewership (over 2017 and through October 2018), according to 7Park. Through that same time, Fox content accounted for 24% of Netflix viewership. So, Netflix will eventually lose around 36% of its viewership numbers once the properties go back to Disney. The company isn’t afraid of Disney, however. Netflix released a statement saying, “Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”

The future of Netflix is going to come down to its own original programming. The company will continue to lose other properties it doesn’t own such as The Office in 2021, its most popular show. How will Netflix fare when it shifts from a platform to a studio? Will investors be confident in the company as a studio making its own properties, or will Netflix’s lack of consumer content like Friends, Parks and Recreation, and Grey’s Anatomy ultimately cause it to fail? These are questions no one directly knows the answers to.

Netflix showed in the first half of 2018 that it can be a sustainable business when its original programming hits with viewers. With the company investing 85% of its budget on original content, it’s safe to say that consumers are going to get more “Netflix originals,” but will this be enough? Netflix will be a company to closely watch this year and is facing one of its most important years in company history.

Interested in the data used for this analysis? We recommend our U.S. Fundamentals and Stock Prices bundle!