We can argue about whether investing in Netflix (NFLX) stock is a good or bad option, but there is no denying that the American entertainment company has changed the rules of the game in the TV series and movie production industry. It was other entertainment companies that had to adapt to Netflix's streaming model.
In this article, we will learn more about this entertainment company`s fundamental and technical background, consider some of the factors affecting the price, as well as will see how to actually invest in Netflix stock.
Netflix Stock: A Brief History of the Company
The company came into existence in 1997 when the founders decided to try out a new model of DVD sales and rentals - over the Internet. After a takeover offer from Amazon (which the owners declined), the company abandoned disc sales and concentrated entirely on distribution (expanding its film library by purchasing rights from film studios) and creating a recommendation system for films - based on search history, ratings, and user reviews.
In 2003, the company was listed on the NASDAQ exchange at $15 per share, after which the stock price rose steadily. By 2005, the number of subscribers reached 6.5 million and Netflix was sending 1 million discs to its subscribers every day.
Progress in increasing Internet speeds and streaming video, in particular, enabled the company to launch a streaming service in 2007 that allows customers to watch movies and shows at any time (the so-called on-demand format). Today, the service has 221 million subscribers and offers TV series, features, and documentaries in different genres and languages in 190 countries around the world. In addition to buying content from third-party producers, the company produces its own content, for which it has already won awards (last year it received its 36th Oscar nomination among distributors). The pandemic year brought in about 30 million new subscriptions.
Fundamental Analysis of Netflix Stock
The company actively cooperates with such American corporations known in the field of cinema as New Line Cinema, Lions Gate Entertainment, Warner Brothers, CBS/Paramount, ABC-Disney, 20th Century Fox, NBC Universal, and others. The company's future growth depends on the development of the Internet and how quickly the interest of users in online movie theaters will grow. At the same time, the popularity of and demand for services offered by Netflix Inc. depends on the release of new movies and TV series, which will be available to customers of the company's online movie theater. The careful analysis allows us to predict the growth of the customer base in the case of offering interesting and exclusive novelties.
Netflix's total share of the global video rental market is over 10%, and the potential is far from exhausted. In the future business development may be determined by the growth of the number of users, who constantly pay for the subscription, not only from North America but also from other countries of the world. Management of Internet - service to intensify the growth of the client base invests in the localization of online cinema, which will increase the popularity of services among users from different countries of the world. This could lead to an increase in the number of regular users, and then to higher revenues and profits, which could push up the stock price.
The company's business may also be boosted by providing users with the opportunity to watch new seasons of the most popular series, which are not yet available in the cinemas of competing companies. This could lead to an increase in the dynamics of the stock. Also, the growth of customer's interest in the service of the company can lead to an increase in funding from Netflix Inc.'s production of content, which includes new movies, music, and children's programs. According to analysts, considering the prospects of the company's business, it is also necessary to consider the fact that new big players, such as Amazon, are actively entering the market of Internet television for private users. This could lead to increased competition and a drop in Netflix Inc.'s revenue and profit growth in the future.
Netflix Stock: Dividends
Netflix Inc. had previously borrowed heavily and in significant amounts to grow its business. This has led to a large amount of liabilities on the issuer's balance sheet today. The high debt burden, which requires the payment of interest and principal on the borrowing, does not allow Netflix to pay dividends to shareholders in cash. According to analysts, the company uses free financial resources, including profits, to grow its business.
Shareholders get most of their income by increasing the value of Netflix stock on the stock exchange. In the future, it is likely that after the reduction of the debt burden, the issuer's management will decide to pay dividends in cash to all holders of the company's shares.
What Affects the Netflix Stock Price
When working with shares for small periods, traders should pay attention to technical factors, which include indicators and oscillators, as well as constantly analyze the incoming information concerning both the issuer and the entire high-tech sector of the U.S. economy, as well as the American market. This will allow you to make a correct prediction on the stock. As a rule, the analytics carried out with the help of technical tools makes it possible to gain profit in short-term trading.
In the mid-and long-term, the stock quotes are influenced by the development of the sphere of collective investments and the inflow of funds from private investors into the funds dealing with risky assets.
As a rule, the price of services for users depends on the US dollar exchange rate. If the value of the U.S. dollar against the currencies of other countries declines, this may increase the attractiveness of the company's services compared to similar offerings of other Internet TV market participants.
When investing for the medium and long term, it is advisable to consider such factors:
- The popularity of the high-tech stocks sector among investors. These securities include shares of the issuer.
- The number of customers and the company's revenue may grow if Netflix prices are more attractive than the cost of going to regular movie theaters around the world.
Growth in the stock price of the company may also be due to increased investor interest in the U.S. market, which will be reflected in a large flow of funds aimed at purchasing U.S. stocks.
In addition, the growth in customer base, revenues, and profits may be due to an increase in the number of films and TV series offered to users, which may push the stock price to new heights.
Netflix Stock: Technical Analysis
On the postmarket, the stock was able to overcome the upper boundary of the former sideways trend and rush towards the next important area, $230-250. Probably, it will be tested in the short range, while the US market continues to rise. It will not be possible to rise significantly higher without correction, as the RSI indicator will soon report that the stock is overbought. It is worth noting that the stock returned above the EMA50, which is a positive signal, but there are still risks of going back up at the moment.
The situation will be negative only if the stock falls below $188, then the targets will drop to $162, near the current yearly low.
On the near-term horizon, Netflix stock would be good for speculation, with a $230-250 test target due to a moderate report.
How to Invest in Netflix Stock?
You have several options for investing in Netflix stock when trading on the stock market. First, you can buy the company's stock on the stock exchanges where it is traded. For example, you can invest in Netflix stock on the NASDAQ exchange, effectively becoming an owner of the company's securities. Such a move can be considered a long-term investment since a trader who owns the stock usually expects the price to rise over time.
In addition, you can trade CFD (contract for difference) for a particular stock and earn on the difference in the price of the underlying asset without actually owning it. CFD assets reflect the price movement of an actual underlying asset - such as Netflix stock - and offer the same chances of making a profit as traditional assets.
If you choose to invest in Netflix stock using CFDs, you can follow the price of Netflix stock in U.S. dollars using the online Netflix stock price chart at one of any trading platform. With technical tools, you can keep track of the streaming company and any events that might affect short-term fluctuations in Netflix stock price. You can hold a long position if you expect the price to rise, or a short position if you expect the price to fall. Such a pattern could be considered a short-term investment. The key difference between trading long with CFDs and actually buying securities is the leverage you can use on the exchange. CFDs are traded on margin, which means that a trader can open larger positions with their initial capital.
What Will Happen to the Stock
Investors should consider Netflix as a company that has already proved the viability of its business model but is facing difficulties because of its scale. The service has already achieved a high level of adoption in several European and North American markets during the pandemic, outpacing its competitors. The company will generate positive free cash flow (including at the end of 2022), while its competitors have a negative value due to a smaller scale of business.
Still, the company expects to earn $7.83 billion in Q3 2022, with EPS projected at $2.14. Thus, this could be the third consecutive quarter of declining revenue growth. The company's expectations were worse than analysts' forecasts, which estimated revenue at $8.1 billion and EPS at $2.72.
Why Invest in Netflix Stock
Investing in Netflix stock today is still a lucrative opportunity. Here are some arguments that support our optimistic outlook on the future of Netflix and its stock price:
- Investment in content: Netflix spends billions on the content it offers to its subscribers, and the extent of that spending is evident in its financial statements. The way Netflix accounts for its content spending complicates valuation because the company uses two different accounting standards, one for licensed content and one for production content, but capitalizes and amortizes both, though on different charts and based on viewing patterns.
- More and more of that spending goes on original content production: Netflix's decision to produce some of its own content in 2013 caused a shift toward original "in-house" content that has accelerated since that year. In 2017, the company spent $6.3 billion on original content, putting it among the top spenders in the entertainment business.
- Netflix knows how to manage analyst expectations: one of the characteristics of all FANG stocks (Facebook, Amazon, Netflix, and Google) is that instead of letting analysts set the rules of the game, they create their own stories and play with analysts. Netflix, for example, has managed to make the expectations game based on the number of subscribers, and each company's earnings report has those numbers at its core, paying less attention to content costs, attrition rates, and negative cash flows.
- Netflix is an experienced, resilient company in the process of international expansion: one of the consequences of turning the numbers game into a numbers game was that Netflix focused on subscribers, it had to go global, with Asia being the gold mine of the near future. What's more, Netflix has proven itself capable of facing a multitude of challenges, becoming an even stronger company.
Netflix has created a business model that burns huge amounts of money on content, uses that content to attract new subscribers, and then uses those new subscribers as a way to increase its market value. Based on all the above-mentioned, we can say that one should grab an opportunity to invest in Netflix stock while it is beaten down.
