NEW YORK (Reuters Breakingviews) - Netflix has ripped up the standard script. It stands virtually alone among rivals in having little if any need for the usual metrics that media companies abide by. Instead, investors have focused on its rapid subscriber and revenue growth. That has fueled its stock-market success. But the $150 billion video-streaming service’s fourth-quarter performance, unveiled on Tuesday, shows how that is coming under threat.
Netflix shares are up more than fivefold since the beginning of 2015, eclipsing Walt Disney, Comcast and AT&T during the same period. All three have launched or have plans for direct-to-consumer services to go head-to-head with Netflix.
The firm led by Reed Hastings stands apart in key ways. First, it doesn’t have to worry about TV ratings because it’s commercial-free. That’s in contrast to Comcast’s NBC Universal, Disney’s broadcast and cable units and AT&T’s Turner suite of channels. The number of people who watch a TV series informs how much a network can charge for advertising and can bolster negotiations with distributors during contract renewals.
Box-office ticket sales are followed obsessively in Tinseltown because they prove the popularity and viability of a movie. But they’re irrelevant to Netflix, which mainly screens flicks like “The Irishman” in theaters only to meet antiquated standards for Oscar nominations. Instead, Netflix releases its own popularity lists – “Murder Mystery” topped the chart last year — though the ranking criteria is comical: It’s based on the number of households watching for at least two minutes.
Revenue in the last three months of 2019 barely beat analysts’ estimates, but there are other signs of strain. The net increase in U.S. subscribers is waning in part thanks to a price hike and new entrants. In the fourth quarter, Netflix missed its own domestic outlook forecast as it did in the second and third quarters. Cheaper packages from rivals are ratcheting up the pressure and also threaten Hastings’ goal of reducing the company’s cash burn, which hit $3.3 billion last year, by around $1 billion.
At some 60 times estimated 2020 earnings, Netflix sports a multiple more than twice that of Disney and Apple. A rich valuation comes with its own unique set of risks. If Netflix fails to rein in its spending or continue meaningful revenue growth, shareholders will rue bingeing on the company’s stock.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.