How to Analyze the Worth of a Streaming Content Stock

Streaming Content Stock

Speculation and gut feeling do play a part in stock trading decisions, but ultimately they are guided by the performance potential of the stocks. You need hard data to back decisions in conventional or online stock trading.  This is no different when chosing a streaming content stock.

Strategic Decisions Make Up Investor Opinion

How companies react to competition often leads to investor opinions being framed. Is the company reacting in a knee-jerk manner? Or has it taken a potentially winning decision that could place it in an enviable position in the years to come? That helps stock traders decide whether to buy its shares, which could be priced low now but could rise later if the company’s decision pays off.

When investors realize the company has made a potentially winning decision, the stock price soars on rising demand for shares of the company. The decision gives hope for the company rising from the current unfavorable or even messy situation it has found itself in. So, could Netflix’s ($NFLX) decision to invest $7 billion to stock up more content for its streaming service raise the optimism for investors in this streaming content stock?

Competition Can Make a Company’s Stock Bearish

Analysts have predicted that by 2020, Netflix ($NFLX) stock could lose 50% of its value. That’s a messy situation. There are various factors that contribute to this. But they all can be summed up in one word – “competition”.

It’s heating up, and Netflix feels the heat most from Disney ($DIS) deciding to end its arrangement with it to supply it with its streaming content. Instead, Disney is launching its own streaming service from 2019.

  • Netflix needs to find new content to make up for the Disney loss. Disney itself has been struggling, with its ESPN sports streaming service losing subscribers. It feels branching out on its own could be the more profitable option.
  • Amazon Prime ($AMZN) is rivaling Netflix for popularity particularly since it is clubbed with its ever so popular ecommerce service.
  • Facebook ($FB) has also announced its greater focus and investment on a video streaming platform, with an eye on Alphabet’s ($GOOGL) YouTube. And Google too has announced greater investment in video streaming.
  • Apple ($AAPL) is also entering the arena, setting apart $1 billion for content. It may be a relatively meager investment, but it’s just the start for the tech giant.

Analysts feel this strengthening competition, particularly Disney severing its ties with Netflix, could affect revenues and earnings significantly for the latter and it isn’t hard to see why. Consumers will be spoilt for choice.

Lack of Original Content Is a Big Flaw

There’s another factor too that analysts point out which could be an Achilles heel for Netflix – its lack of original content. That’s considered a significant flaw in the plot, and the reason why Disney’s decision could hurt more.

The announcement of Netflix setting apart more and more investment for creating original content and acquiring licensed content in the coming years could help its stock by giving investors hope of a change. Netflix is setting apart a budget of $7 billion to be spent next year on its programming content. The company has been increasing its content budget since 2016. In 2017 it spent $2 billion more than its 2016 content budget, while in 2018 it will be spending $1 billion more.

Spending on Licensed Content Raises Cash Burn Rate

But increasing the spending isn’t necessarily a good thing. The majority of Netflix’s programming will be licensed content and the rest original content, though a few years down the line Netflix would want to make the ratio 50-50. The Netflix Originals shows are increasing, but most of these are licensed content rather Netflix-owned ones.

Acquiring licensed content is expensive, to say the least. In its quest to acquire content, Netflix has had to spend more and more. That shows in its cash burn rate, which rose to $1.7 billion last year from $900 million in 2015. For 2017, the forecasted cash burn rate hovers from $2 billion to $2.5 billion. This leads to debt accumulating – not a positive sign.

No Original Content Means Netflix Is still Begging Disney

From 2019 Disney-branded movies would be pulled out of Netflix though some kinds of Disney content will remain, particularly in global markets. While Netflix is still negotiating with Disney to retain the rights to stream content from Disney-owned Star Wars and Marvel franchises, Disney’s decision sent Netflix shares into decline.

The announcement of Netflix investing $7 billion on content in 2018 may be an indication of its determination for market leadership, but for any streaming content stock company it needs original content to be sustainable. It’s still something Netflix needs to work on.

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Tradezero

TradeZero is an online broker dealer that offers commission free trading of the US equity markets, US equity and index options trading. Its clients receive up to 6 to 1 intraday leverage and the ability to trade the US markets without any pattern day trading rules. TradeZero clients have access to a variety of cutting edge trading platforms which include real-time streaming market data.

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