Netflix stock a good gauge of the new internet boom

April 29, 2019 09:56
Despite burning huge amounts of cash and continuing to post losses, Netflix has seen its share price well supported in the market. Photo: Reuters

How frenetic is the internet stock boom?

Take a look at Netflix, and you can get some idea.

The streaming video company saw cash outflow of nearly US$3 billion a year, yet its share price has kept rising.

The market cap of Netflix has hit US$160 billion, after its stock price surged eight-fold over the last five years.

The stellar stock performance has lured several big players into the streaming video market.

Disney recently unveiled its heavy bet on streaming service called Disney Plus. It will offer exclusive Disney movies and TV shows, including Marvel series, Star War series, The Simpsons, National Geographic, etc. Disney also holds 30 percent stake in another video streaming platform Hulu. Disney's ESPN Wide World of Sports Complex, meanwhile, is competing in the sports streaming market.

Netflix costs US$8.99 per month for its basic plan, while Disney Plus has set its monthly fee at US$6.99, ESPN and Hulu at US$4.99 and US$5.99 respectively.

Such Disney pricing policy will put pressure on Netflix. Besides, HBO and YouTube are also strong competitors.

Coming to Netflix programming, The House of Cards fever seems to be fading off.

Also, none of the platform’s six most-watched shows including “Friends”, are self-produced.

"Orange Is the New Black”, the highest ranking Netflix original, only ranks 14th on Netlfix’s most popular show list.

Nobody can guarantee that he/she can produce a blockbuster show even if they have the best directors or production company.

That is the difficulty Netflix faces. But if it has to pay top dollar for others' productions to retain customers, the bottom line will be eroded.

Another core issue for Netflix is lack of operating cash inflow.

Disney has steady ticket revenue to allow it to burn money. Other internet giants that are planning to compete with Netflix have deep pockets.

If Netflix cannot produce another hit show quickly, it may struggle to convince banks to keep lending it money, and liquidity could become an issue.

To some extent, Netflix and Tesla are similar. They were pioneers in video streaming and electric cars respectively. They were able to woo customers initially, but they could be gradually losing the technological advantage as rivals catch up.

Despite all these problems, Netflix shares remain popular, and this is an indication of just how hot the technology sector is.

Ride-hailing giant Uber is expected to launch its IPO next month. Among other news, Disney recenly closed its multi-billion-dollar acquisition deal for the entertainment assets of 21st Century Fox.

Large IPOs and a hectic M&A market are usually signs of a market bubble.

This article appeared in the Hong Kong Economic Journal on April 24

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Columnist at the Hong Kong Economic Journal