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Netflix Stock Analysis (FY 2020)

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Netflix, Inc. | North America | Online Services | Fiscal Year 2020 | ISIN: US64110L1061
Reading Time: 9 minutes
Netflix certainly is among the Corona winners and recently published its annual report. We have crunched the FY 2020 numbers for you. How does the leading streaming provider perform in our roovestor company score? What’s the Netflix story and how does the company’s business model look like? What are the major strengths, weaknesses, opportunities and threats? Learn all this and much more in our exclusive stock analysis. Is it a buy?

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Qualitative Analysis

Company History

A company to rent DVDs by mail
Netflix was founded by Reed Hastings and Marc Randolph back in 1997. The name combines net for „internet“ and flix for „flicks“ which is a synonym for „movie“. The name perfectly fits Netflix’ current streaming concept. However, at the very beginning, the concept was different. The original idea was to rent out DVDs and ship them by mail which was not a bad idea since DVDs were new at that time and – compared to VHS – the compact size of the medium made mailing much easier. The DVD rental and sales site netflix.com launched in 1998 and offered a subscription-based model for unlimited DVD rentals one year later. Netflix hit 1 million members until 2003 and 5 million members until 2006.
The upswing of the company
In 2000, Netflix sought to be acquired by Blockbuster – a giant company worth 6 billion USD at that time. The idea was to sell Neflix for 50 million USD and to allow Netflix to run the Blockbuster website as an online rental service for movies. For Bluckbuster, the decision to abandon the deal couldn’t be worse. Netflix made it to a multi-billion dollar company, reinventing and dominating the movies industry – whereby Blockbuster filed for bankruptcy after some time. Hastings published his book „No Rules Rules: Netflix and the Culture of Reinvention“ together with his co-author Erin Meyer in 2020. The book describes the company’s road to success by relying on a modern company culture. Just as many other Silicon Valley startups, Netflix was hit hard by the dot-com bubble burst in 2001. The streaming provider survived – but had to lay off a third of its staff. The turnaround was driven by seven aspects of the company’s culture leading to high efficiency and long-term business success.
A corporate culture making Netflix a great place to work
Illustration 1: Netflix Corporate Culture
The original 125-slides culture deck was published back in 2009. Today, Netflix has an updated culture site – but the core values did not change. Hasting’s ambition was to make Netflix a great place to work. In return, he expected (and still expects) great results from his employees. It’s more the quality than the size of his team. Hastings believes that best results will be given by a talent-dense team. He created a culture of candor, eliminated some policies (e.g. working hours and vacation rules), gave responsibility and payed top salaries to his employees. In the latest Global Brand Health Report published by Hired, Netflix was listed as the top tech company people want to work for in 2020.

Business Model and Outlook

Although we believe most of our users are familiar with the product, we provide you with a brief overview on it. Netflix is a pioneer in the delivery of streaming entertainment. Members can watch (ad-free) TV series, documentaries and movies – licensed content and Netflix originals – anytime and anywhere. The only requirement is an internet-connected screen (e.g. smartphone, notebook, smart TV). The platform content covers a wide range of genres and is translated into a variety of languages. Members can watch content via streaming or alternatively download selected titles for offline view. Netflix has a subscription-based business model with three subscription plans (Basic for 8.99 USD, Standard for 13.99 USD and Premium for 17.99 USD) ensuring predictable revenue stream for the company. Higher-priced subscription plans offer HD and UHD compatibility and allow to use multiple screens at the same time as well as a higher number of different devices for title download.
Netflix has grown tremendously over the years. The streaming provider has reported a total of 204 million paid memberships by end of 2020: 74 million paid memberships in United States and Canada (+6 million vs. 2019), 67 million in Europe, Middle East and Africa (+15 million vs. 2019), 38 million in Latin America (+6 million vs. 2019), 25 million in Asia-Pacific (+9 million vs. 2019). The company licenses streaming rights for a variety of TV shows and movies. Netflix had 13.7 billion USD worth of licensed content by end of 2020. Licenses are expensive, limited in time and subject to regional restrictions. Thus, it is clear that – for the company – in-house productions could become more attractive over time. Netflix has created great original content in the past – with a total of 15 Academy Awards after the platform has taken home 8 additional awards in the 93rd Academy Awards ceremony in April 2021 – and is still working on new content. Content creation is not an easy thing to do in times of the pandemic as international travel has been severely curtailed and many productions are disrupted.
Media 1: Official “ROMA” trailer, one of the first Netflix movies that won Academy Awards
Netflix intends to grow their streaming membership business around the world. The company will be able to achieve further revenue growth by attracting new members – something Netflix has done extremely well in the past. Moreover, price increases (like happened in Q1/2021) and switching members to higher-priced subscription plans can positively affect future results. Competition in the streaming market becomes increasingly fierce. Thus, it is essential for Netflix to keep member satisfaction at a high level by continuously developing strong in-house productions, improving the user interface and expanding the number of compatible devices.

Netflix SWOT Analysis

Netflix’ has outstanding strengths that make it difficult for competitors to keep up with the #1 streaming platform. As noted above, the modern corporate culture attracts outstanding employees, resulting in a high talent density. The tremendous growth as well as the ever-growing range of exclusive content on the platform are further key advantages in the tough competition field. As a pioneer in the streaming market Netflix has a first-mover advantage. The “Netflix” brand is world-famous and could achieve a level of recognition that is close to brands such as “Google”. Netflix is available on virtually any internet-connected device which is another strength of the platform. The company’s revenue is predictable thanks to the subscription-based business model.
It is hard to argue that Netflix is not the most dominant streaming platform on the market – but we also identified some weaknesses on the company. Competition is tough and getting stronger over time. A while back, Disney content was available on Netflix, until Disney stopped renewing those licenses and launched its own streaming service called “Disney+”. Netflix’s dominance starts to slow as rivals gain (Disney+, HBO Max, Amazon Prime, Paramount+, AppleTV+, Youtube…). In-house productions are currently slowed down by the pandemic (temporary weakness). Furthermore, Netflix is known to rely heavily on the North American market. In 2020, around 46 % of total revenue was linked to the North American market.
However, this currently still strong dependence on the North American market also leads to the first opportunities. There is still great growth potential in other regions around the world. In 2020, around 41 % of new paid memberships were generated in the EMEA region (Europe, Middle East, Africa). The company is able to strengthen user loyalty through additional high-quality in-house productions. Netflix is an ad-free streaming platform at the moment. But switching to an advertising-based business model – or combining both – could boost future revenue growth. Further opportunities arise from potential partnerships and alliances. The company is also aiming to expand its merchandising business (e.g. with “The Witcher” series). Competitors such as Warner Brothers with “Harry Potter” or HBO with “Game of Thrones” already demonstrated how to make money in this area.
The competitive pressure leads to a major threat. It is quite uncertain whether competitors will manage to stop the Netflix boom with exclusive content or partnerships/alliances, more favourable pricing models or even disruptive technologies. Furthermore, we have identified several cyber risks that are quite common in the streaming business. Digital piracy and hacked user accounts are among these threats. In times of pandemic – with a growing userbase due to global lockdowns – hacking activity already increased leading to a serious threat for Netflix users. Our last threat to mention is linked to governmental decisions. In the first half of 2020, Netflix was forced to reduce its streaming quality in Europe in order to prevent the internet collapsing in times of pandemic.

Netflix CEO’s: Reed Hastings and Ted Sarandos

Netflix is following a dual-leadership model with both co-founder Reed Hastings (owns around 1 % of Netflix) and Ted Sarandos serving as co-CEO’s. Hastings received a Bachelor of Arts in Mathematics from Bowdoin College in 1983 and a Master of Science in Computer Science from Stanford University in 1988. Since founding Netflix, he has gained extensive management experience in the technology sector. From 2011 to 2019 he was member of the Board of Directors of Facebook and a board member of Microsoft from 2007 to 2012. Hastings is known for thinking outside the box – as proven by the modern corporate culture. He believes Netflix has much to learn from Disney+ and its focus on family entertainment. This attitude of never stopping learning and continuous optimization is indispensable for top managers in rapidly growing and constantly changing markets.
Sarandos joined Netflix in 2000. He is co-CEO and Chief Content Officer of the company. Sarandos could be described as a TV nerd. He grew up in an entertainment-obsessed family excessively watching movies and TV shows. Sarandos led the company’s transition into original in-house production around the world including “House of Cards”, “Orange Is the New Black”, “Stranger Things” or “La Casa De Papel” (Spain). In his Netflix carrer, Sarandos took unconventional risks without consulting Hasting beforehand. Sarandos invested 100 million USD on his own to produce “House of Cards” – but fortunately it was a great success. He uses algorithms in order to understand user behaviour and interests helping to tailor content suggestions perfectly to the respective user.

Quantitative Analysis

Netflix FY 2020 – roovestor company score

Disclaimer

We assume no liability for the accuracy of the financial data. Sources of the financial data are foremost IR websites of the company subject to the analysis. Additionally we rely on further data and information from Thomson Reuters EIKON. Moreover, unless better data is available, we do our own calculations of available data for KPI determination. Our stock analyses are by no means to be understood as a buy or sell recommendation and do not provide any conclusions regarding the future development of the company (and thus the future price development of the share).