Who Are Netflix's Main Competitors? (NFLX)

In an age when cable networks and over-the-top providers of streaming content are vying in every way possible for a bigger number of eyeballs, Netflix Inc. (NFLX) has many competitors. And while current and potential shareholders in Netflix should be aware of which companies pose the biggest threats to the company, they also should question whether those threats really matter.

Competition matters in every industry, but Netflix' situation could be different.

The biggest competitive threat to Netflix is probably Amazon.com Inc. (AMZN). According to a report released by Nielsen in November 2017, in the second quarter of 2017, 59% of American households had access to at least one subscription video service, almost certainly Netflix or Amazon. While Netflix is famously private about their ratings, they announced in 2018 that they have over 110 million subscribers worldwide. Things were certainly looking up for Netflix, which announced in its Q4 earnings that the company achieved a full-year positive international contribution profit for the first time, and held a market cap of over $100 billion.

Nielsen also reported that live television viewing was down to an average of 5 hours and 56 minutes per day in Q2 2017, while PC internet usage actually decreased to 2 hours and 52 minutes and smartphone internet usage surged to 2 hours and 59 minutes. As for the growth potential for streaming services: 5% of American households have broadband access but no streaming service.

However, Netflix released Q2 earnings on July 16, 2018, revealing subscriber growth far smaller than what was expected. While research firm StreetAccount expected domestic growth of 1.23 million new subscribers and international growth of 5.11 million new subscribers, Netflix only saw 670,000 new domestic subscribers and 4.5 million new international subscribers in the last quarter. Netflix stock fell as much as 15% to $342 during extended trading. 

The company's outlook for the current quarter also signals a deceleration. Netflix expects to add 5 million customers in the coming quarter, a slower pace than a year earlier.

Netflix is a contributor to so-called cord-cutting—when consumers forgo traditional cable network TV in favor of alternative, usually streaming services—and it’s crushing its competition for one simple reason: It's providing quality original content at an affordable price. For example, when you think of Netflix, you likely think of the shows House of Cards and Orange is the New Black. Whether you like these or not, you can't deny their popularity. Amazon Prime is affordable at what breaks down to be $12 per month, and has recently acquired award winning content like The Big Sick and Transparent. Amazon's internal documents show that original top television shows brought more than 5 million people globally to its Prime shopping club by early 2017.

As far as Hulu Plus goes, it’s owned by 21st Century Fox (FOX), the Walt Disney Co. (DIS) and NBCUniversal, a subsidiary of Comcast Corp. (CMCSK), although Disney will become the majority shareholder if they successfully complete their acquisition of Fox's assets.  For now, too many cooks spoils the broth and leads to a lack of clear direction and innovation. Also, Hulu Plus comes with ads; most people don’t want to watch ads when they can watch ad-free content for the same price with Netflix, although a more expensive plan removes most ads.

Time Warner Inc. (TWX) offers HBO Now, but it costs $15 per month. HBO was the former content king, but the crown (not the show) has been taken by Netflix, who delivered 1000 hours of original content in 2017 compared to just about 600 hours of original content for HBO. HBO Now has 3.5 million viewers, whereas Netflix has 110 million, so if you’re looking for growth, Netflix is your choice; that pertains to both the top and bottom lines. This chart shows Netflix's  growth over the past three years:

You don’t see growth like this too often; Netflix seems best of breed in its space. 

This first and most obvious threat to Netflix is programming costs. For example, the company announced it would spend up to $8 billion on content in 2018. That’s mildly insane content, and bidding wars could lead to even higher costs. But Netflix is growing its top line so fast that it could help offset this concern. A related concern is free cash flow, which for FY 2017 came in at negative $524 million. This part of the story comes down to whether or not Netflix can outgrow its expenses. If Netflix wants to increase the odds of making this happen over the long haul, it’s likely going to need to keep churning out big hit after big hit. It can’t rely on The Crown and Orange is the New Black forever.

The other concern is much simpler. Netflix currently has a TTM P/E ratio of 221.21, making it a relatively high growth stock. If the broader market were to falter due to investors thinking it is overvalued, Netflix would not be seen as a place to hide. In fact, those invested in Netflix might panic and sell to move into safer names. This would hit the stock hard. And that’s what investors care about most: the stock price. The good news is that no direct competitor to Netflix is within the same stratosphere when it comes to quality and price. Therefore, if this remains to be the case, it should find a way to be a winner for some time. 

Netflix dominates its competition in streaming — that’s not a concern. The real worries are programming costs and stock valuation in what is likely to be a volatile stock market over the next several years. This can lead to some painful drops, but if you’re looking at the underlying business of Netflix, it still could be a long-term winner.

At the time of initial writing, Dan Moskowitz did not have any positions in NFLX, AMZN, CMCSK, TWX, FOX or DIS. This post has been updated throughout.