Thread by @justvalue2

Open thread about Netflix ($NFLX). Netflix seems to be an astonishing business but would it be able to achieve market expectations?
Below some positive (P) and negative (N) points
(no advice, just food for open discussion)

POSITIVE POINTS (P):
P.1. Netflix is a highly replicable and scalable business within a trillion-dollar industry (i.e. huge total addressable market) and it has proven to be able to globally expand and compete.

P.2. Netflix has demonstrated to be able to successfully adapt its business model (from renting DVD by mail to streaming video service) and to anticipate threats and competitive landscape’s changes (e.g. current focus on original content vs licensed one)

P.3. Netflix enjoys a dominant position with a huge market share. It has been committed on getting global scale as soon as possible and this required a cash-burning strategy, but this is expected to be off-set in the future and it is not rare in the growth phase of a company.

P.4. Netflix has been strategically creating "consumer surplus" by providing excess consumer value over the price of the service. This has allowed Netflix to increase its customers base and to underpin its future pricing power

https://twitter.com/justvalue2/status/1108423157189218305

P.5. Netflix business model depends on scale (operating leverage), but once the relevant scale has been achieved it is expected to be really profitable: with marginal costs close to zero, increases on subscribers base or subscription price will have a relevant impact on earnings

P.6. Netflix bets on the creation of a virtuous cycle supported by its huge market share and increasing subscribers base: higher subscribers base will mean higher revenues, and so higher investment in content, and so higher quality & engagement, and so higher the subscribers base

P.7. Netflix has proven to make really good strategic decisions (e.g. content’s adaptation to local markets, from local-to-global strategy leveraging local content, bundling strategies, strategic alliances with local partners, etc.)

P.8. Netflix is strongly betting on big data to improve customer’s experience and content’s quality (also benefited by its dominant position and huge market share) and on in-house technology (more difficult to replicate)

P.9. Netflix’s culture is focused on delighting and retaining customers and on improving its experience. This is a long-term-value maximization strategy which sometimes comes with short-term pain to shareholders.

P.10. Netflix seemed not to initially enjoy any specific moat, but all of the above mentioned and the global scale it has reached seem to be creating some sort of moat (that seems to be steadily increasing) and besides it enjoys the advantages of the first mover

NEGATIVE POINTS (N):
N.1. Netflix’s stock price seems to be expecting a relevant increase in revenues. As a consequence, in spite of being Netflix a really good business, it might be not a good investment.

N.2. Increasing revenues by extending subscriber base might face some headwinds: high and increasing competition; maturity of developed markets; challenging expansion into emerging markets, etc.

N.3. Increasing revenues by modifying subscription’s price might be also challenging, due to the strong competition and to Netflix’s reliance on a single product (streaming services) that could put some pressure on its pricing power.

N.4. Netflix provides basically one single product (streaming services) and this reduces its capacity to compete. Its main competitors (e.g. Amazon, Disney, Apple) are able to draw on different strategies and are less “under pressure” to be profitable on their streaming services.

N.5 Competition is expected to remain high or even increase. As a consequence, the cost of content’s quality (investment in original content) is expected to remain high, with potential negative effects on Netflix’s cost structure and its capacity to improve margins.

N.6. High competition is expected to affect also licensed content as different players will bid for a limited range of products and some of the providers will enter into the streaming services business (and will probably reclaim back their licensed rights).

N.7. Netflix relies on scale much more than its competitors and this will put permanent pressure on its cost structure (as it will have to continuously increase/improve its content offer).

N.8. Netflix, in its current configuration, and its subscribers base are still pending to show its performance under a less favorable phase of the economic cycle

N.9. Netflix’s capital needs will keep increasing until the company generates positive cash flow. This is worrisome by itself but even more in a rising-interest-rate scenario. Besides cost of debt is starting to increase as a consequence of borrower’s higher perception of risk.

N.10. Netflix’s expansion into emerging countries might be much more challenging than previous expansion in developed ones (less affordable service; higher price sensitivity; higher exposure to pirated content; potential infrastructure problems; etc.)

N.11. Netflix is creating its own moat but this does not mean nowadays an “impenetrable” moat (as it is the case of the other FANGs). Several of its competitors have long operating histories, large customer bases, strong brand recognition, and huge resources.

N.12. This is an industry with no really high switching costs: customers are able to change with a simple online operation and there are no penalties. This, together with the need of a big scale, will put pressure on cost structure (requires continuous improvements & investments)