NEW YORK (Reuters Breakingviews) - Netflix’s valuation outstrips its burgeoning opportunity. The $87 billion video-streaming service hit another all-time high on Monday, benefiting in part from Comcast and AT&T recently warning of a fall in subscribers. Pay-TV customers cutting the cord should mean more viewers for Netflix. But even that and a fee hike last month don’t justify it trading at a sky-high multiple.
The company led by Reed Hastings added 5.3 million new subscribers in its third quarter, taking its total tally around the world to 109 million customers. That beat the 4.5 million analysts had been expecting. That was after the company’s shares closed at a record $202.68 a piece on Monday, making the firm worth more than Time Warner.
Aiding the run-up is the expected bloodbath in pay-TV subscriptions. Last week AT&T admitted it would lose 90,000 customers in the three months to the end of September as they abandoned its video product because of competition and hurricanes. Rival Comcast had earlier raised a similar yellow flag.
The specter of people ditching expensive cable packages is fast becoming a frightening reality. Pay-TV subscriptions are forecast to decline 3.4 percent in the third quarter, even faster than the bruising 2.7 percent drop in the previous three months, according to MoffettNathanson.
Traditional media companies like Walt Disney are only now contemplating launching their own direct-to-consumer packages. Netflix has the first-mover advantage, having offered streaming video for a decade. Other similar products that CBS and HBO offer have fewer than 5 million subscribers each, just a fraction of the customer base Hastings has built.
Trouble is, Netflix now trades at almost 40 times 2020 earnings. That looks like a work of fiction as it is. But the company also carries sizable risk. Hastings has, for example, pledged up to $8 billion for TV shows and movies next year compared to $5 billion in 2016. He’s also trying to ramp up the amount of content the company can produce in-house to replace licensing third-party shows that currently soak up most of the budget. That suggests Netflix will be burning through cash for a long time yet.
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