Thanks to its monster success at spearheading streaming video entertainment, Netflix (NASDAQ: NFLX) is a global media powerhouse. And investors have been rewarded as shares have skyrocketed 1,150% and 14,530% in the past 10 and 20 years, respectively.
There aren’t many businesses that can show this type of wealth creation. But before you rush to scoop up this top streaming stock, first take the time to understand my three biggest bear cases for this industry-leading enterprise.
Netflix’s ascent throughout the 2010s was nothing short of amazing. The business was able to add new subscribers in remarkable fashion primarily because it was a much better experience for consumers.
Being able to choose from a massive list of shows and movies to watch what you want and when you want completely upended the traditional cable TV industry. Plus, it was cheaper.
But capitalism invites competition. And other media businesses didn’t sit around resting on their laurels. These days, there are many streaming choices for viewers. This will continue to make it increasingly difficult for Netflix to stand out from a crowded pack. All streamers provide a superior user experience.
Netflix must deal with some deep-pocketed rivals like Walt Disney, Apple, and Amazon, all of which have compelling streaming services. There’s also Alphabet‘s YouTube, which has an estimated 2.5 billion monthly active users.
Netflix will have to stay on top of its game if it wants to maintain its lead in a very competitive industry. If management slips up in any way, the business could find it difficult to add new members and keep its existing ones satisfied.
In the past 10 years, Netflix saw its quarterly revenue surge from $1.3 billion in the first quarter of 2014 to $9.4 billion in the same quarter of 2024. And the current subscriber base of 270 million is almost six times higher than it was back then. These are truly outstanding growth rates.
It’s safe to assume that these gains aren’t going to continue. Besides the competitive forces that I just talked about, Netflix has made substantial progress at penetrating its key markets, which limits expansion potential over the long run.
With 83 million subscribers in the U.S. and Canada, Netflix is a mature service in these key markets. And with the company about a year into its password-sharing crackdown, a strategy that has helped boost customer additions, the incremental benefits could be coming to an end soon.
So, most of the member growth will likely come from emerging markets, particularly India. But the business has much less pricing power there, as GDP per capita pales in comparison to here in the U.S.
Investors with a critical eye might think that the current forward price-to-earnings multiple of 33.7 is too expensive given that growth will certainly decelerate in the years ahead.
There’s one unique challenge that a company like Netflix faces, and that’s what content to invest in. Contrast this with a business such as Chipotle, which has a proven playbook of opening new restaurants that generate revenue and cash flows that can be estimated with reasonable accuracy based on historical data.
Netflix essentially invests in art. Even if you have huge budgets and a long list of star actors and actresses for productions, the show or movie could still end up being a flop. Of course, Netflix’s management team deserves credit for having built up some level of skill at content creation.
It is concerning, however, that not only is developing and acquiring fresh content extremely expensive (something that isn’t going to change), but its ultimate success is also unpredictable since no one really knows what viewers will gravitate toward.
Perhaps there’s the chance that Netflix’s return on these cash outlays starts to diminish over time. And that would undermine its dominant competitive position.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Chipotle Mexican Grill, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.
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