While Netflix, Inc. (NASDAQ: NFLX) has remained at the forefront of the streaming industry for quite a few years, many are growing concerned that the streaming giant’s days of dominance are coming to an end.
Stiff competition from the likes of The Walt Disney Company (NYSE: DIS), Amazon.com, Inc. (NASDAQ: AMZN), Hulu, NBC, Apple, Inc. (NASDAQ: AAPL), and others continues to emerge. As Netflix’s programming costs continue to rise, investors and analysts are beginning to question the company’s long term staying power.
Netflix’s reported fourth quarter 2019 earnings did beat on both the top and bottom lines. However, lackluster guidance for the first quarter and weaker-than-expected domestic subscriber growth, highlight a potential coming slow-down.
Famed Hedge Fund Manager Shorts Netflix
David Einhorn of Greenlight Capital has a strong reputation for making winning bets against major companies like Enron. Recently Einhorn reiterated his firm’s belief that Netflix is on its way down.
In a letter to clients, Einhorn wrote, “we have been negative on NFLX’s earnings prospects for a long time, and we used the late-2019 bounce in the shares to make it a more substantial investment.”
Einhorn pointed to Netflix’s financial troubles as a major concern, stating “at present, NFLX burns several billion dollars a year in cash and has accumulated a heavy debt load, even before considering future content commitments.”
The hedge fund manager also pointed to growing competition as another major concern regarding Netflix’s future. As more and more streaming service providers make their debut, “not every customer will choose to subscribe to all services, and on the margin, substitution will occur,” Einhorn wrote.
Netflix’s Costs Keep Rising
Netflix remains a leader in the streaming industry largely due to its commitment to purchasing and producing content to add to its platform. This, however, could also be the reason that the company falls to its competition.
Per Forbes, Netflix has gone from spending less than $1 billion on content in 2011 to spending around $12 billion in 2018. Meanwhile, spending per subscriber has gone from $36 to $81 in the same timeframe.
While Netflix relies on constantly putting new content on its platform to attract and retain subscribers, the company’s constantly-increasing spending might be too much for its subscriber growth rate to make up for over the long term.
Stiff Competition Spells Trouble
Adding to Netflix’s troubles is the constant development of new streaming services from major competitors like Disney, NBC, and Apple.
For the past several years, Netflix’s main competitors have been Amazon and Hulu. However, with the former having about 97 million subscribers as of 2019 and the latter having around 79 million subscribers, neither of these services are a major threat to Netflix on their own.
However, Netflix now faces competition from other major platforms, such as Disney+, ESPN+, Apple TV+, HBO’s lineup, YouTube TV, and the upcoming Peacock — NBC’s new streaming platform.
As a result, many investors share the same concern that Einhorn pointed out in his letter to clients — at some point, subscribers will have to start picking and choosing which services they subscribe to. Meaning, Netflix stands to lose market share in the coming years if it’s not able to outshine its competitors.
Article By: Connor Beam