I think Netflix (NASDAQ: NFLX) stock is one of the most overpriced equities around. For instance, Mr. Market priced Netflix at $292.86 on 4 November 2019.
Yet Netflix reported revenues of just $5.245 billion on 30 September 2019. However, Stockrow estimates those revenues grew at a rate of 31.14% in the last quarter. In addition, Netflix’s revenue growth rate is up from 26% in the previous quarter.
Moreover, Netflix’s revenues grew from $4.923 billion on 30 June 2019 to $5.245 billion on 30 September. Thus, I estimate Netflix gained $322 million in new revenue in three months.
Is Censorship a Threat to Netflix?
Hence, I conclude investors are betting on Netflix’s ability to grow. However, there could be serious threats to Netflix’s growth.
Interestingly, censorship and regulations could be the biggest threats to Netflix growth. For instance, 57% of Indians want their government to censor streaming video, Business Insider claims.
To explain that number comes from a YouGov poll. The same poll found 91% of people in India want their government to regulate (censor) streaming video content.
Accordingly in September the Indore Bench of the Madhya Pradesh High Court ruled that some streaming video content is obscene and needs censorship, Vice reports. The high court is the state supreme court in India’s sixth most populous state Madhya Pradesh.
The court was ruling on a pressure group’s lawsuit that charged the Indian government was shirking its duty by not censoring streaming video. In India, all movies need to the approval of the Central Board of Film Certification to win release. However, the board ignores streaming video.
Censorship could destroy steaming video in India by changing its content to bland, family friendly mush, Vice speculates. I think Netflix could lose a lot of money if censors in countries force their standards on its content.
Could India Censor Netflix?
Meanwhile, India’s Ministry of Information & Broadcasting is considering certifying (censoring) streaming video, Business Insider claims.
History shows that censorship can limit a medium’s creativity. For instance, the notorious Production Code; or “Hayes Code,” put severe limits on content in Hollywood movies for over 30 years.
Interestingly, Hollywood partially adopted the Hayes Code to satisfy the demands of the British Board of Film Censors. The fear was that the Board of Film Censors could bar Hollywood movies from the British Empire.
The British Empire was the largest market for English-language movies in the early to mid-20th Century. Consequently, American studios made many films glorifying the British Empire in the 1930s and 1940s. For example, Gunga Din, Lives of a Bengal Lancer, Charge of the Light Brigade, and That Hamilton Women.
Today, India is the largest market for English-language streaming video. So history could repeat itself.
Hollywood only scrapped the Hayes Code after British and Italian movies began out grossing American films at the box office in the 1960s. Thus, foreign censorship is dangerous to American tech companies.
Are There Limits to Netflix’s Growth?
Censorship is not the only threat to Netflix. There could be serious limits to Netflix’s subscriber growth.
Netflix failed to add the seven million subscribers analysts predicted in 3rd Quarter 2019, Recode estimates. However, Netflix nearly reached that goal by adding 6.8 million subscribers last quarter. In addition, Netflix added 500,000 subscribers in the USA instead of the 800,000 analysts wanted.
Thus, Netflix is still growing like a weed. Yet, the streaming video service is not growing fast enough for Wall Street. The high share price indicates Mr. Market; on the other hand, is satisfied with Netflix’s growth.
Furthermore, Netflix claims it will add 26.7 million subscribers worldwide in 2019. If that projection is true, Netflix will add fewer subscribers than in 2018 when it added 28.6 subscriptions to its platform.
In total, Netflix still has a huge platform with 158.3 million subscribers worldwide and 60.6 million American subscribers, Statista estimates. In third quarter 2019, Netflix had 97.7 million subscribers outside the United States.
Thus Netflix is vulnerable to Indian censors because India is the largest English-speaking country. Worldometers estimates India had a population of 1.371 billion on 1 November 2019. Thus, India is the biggest market for Netflix’s products.
Netflix’s Incredible Competition
However, I think competition is the greatest threat to Netflix (NASDAQ: NFLX). Netflix has an incredible number of competitors that grows each day.
In India, Netflix competes with Balaji Telefilms, Netflix, Amazon Prime, Ullu, Viacom 18, VIU, and Yash Raj Films, to name a few. In the United States, Disney+, Amazon Prime, HBOMax, Apple Plus TV, CBS Digital, Hulu, and Acorn lead a growing army of streaming video platforms.
The analytics firm Jumpshot claims Disney+ had over one million US subscribers, on 31 October 2019, TechCrunch reports. Incredibly, Disney+ is not available yet. Disney (NYSE: DIS) plans to launch Disney+ in mid-November 2019.
Is Disney+ a Threat to Netflix?
In addition, UBS analysts estimate 44% of 1,000 American consumers they polled in October 2019 plan to order Disney+, TechCrunch claims. Thus, Disney+ could assemble a huge subscriber base fast.
Meanwhile, Disney itself projects Disney+ could have 60 million to 90 million subscribers by 2024, TechCrunch notes. If that prediction comes true, the Disney+ platform could rival Netflix’s subscriber base in five years.
However, many people subscribe to multiple streaming video platforms, Jumpshot claims. Jumpshot found 12.5% of would-be Disney+ subscribers already subscribe to over one streaming video service.
Moreover, 31% of Disney+ fans subscribe already subscribe to at least streaming video platform. In detail, 19.4% of self-processed Disney+ subscribers stream from Amazon Prime, 9.1% of Disney+ members use Hulu, and 18.5% of Disney+ fans subscribe to Netflix.
Disney+ vs. Netflix
It appears that Disney+ is becoming a major threat to Netflix. I think Disney+ threatens Netflix by offering safe “family-friendly;” in other words censored, programming.
In addition, Disney owns major pop culture franchises; including Star Wars, Marvel, the Simpsons, and Buffet the Vampire Slayer. Such franchises have large fanbases so they could drive millions of new subscribers to Disney+.
One problem Netflix faces is that it owns no large pop culture properties. Netflix streamed Marvel shows a few years back, but Disney pulled them. Predictably, new Marvel shows will be on Disney+.
Can Disney Destroy Netflix?
Plus, Disney+ has vast resources behind it. Those resources include two major U.S. movie studios; Disney and 21st or 20th Century Fox, Pixar, Marvel Comics, a huge merchandising machine, the theme parks, and several American TV networks. All Netflix has its platforms and some modest; by Hollywood standards, production facilities.
Additionally, Disney has more money than Netflix. Disney reported $6.728 billion in cash and equivalents and $209.475 billion in assets on 29 June 2019. Netflix reported $4.435.02 billion in cash and equivalents and $30.942 billion in assets on 30 September 2019.
Thus, I conclude Disney+ and its sister platform, Hulu, are the biggest threats to Netflix. To explain, Hulu began as a joint venture of 21st Fox, Disney, Comcast (NASDAQ: CMSCA), and Time Warner.
However, Disney bought full control of Hulu in May 2019, CNN Business reports. Statista estimates Hulu had 26.8 million total subscribers in May 2019. However, they only offer Hulu subscriptions in the USA.
Disney is assembling a vast streaming video empire that could rival Netflix’s in size and scope. In addition, Disney has the resources to create or buy vast amounts of exclusive programming to dominate the market.
How Much Money is Netflix Making?
Impressively, Netflix (NASDAQ: NFLX) is making money. For instance, Netflix reported a quarterly gross profit of $2.147 billion on 30 September 2019.
That gross profit was up from $1.917 billion on 30 June 2019. In addition, Netflix reported quarterly operating income of $980.24 million and a quarterly net income of $665.24 million. Those numbers were up from $706.42 million and $270.65 million on 30 June 2019.
However, Netflix is still burning through a lot of cash. For instance, Netflix reported a negative “operating cash flow” of -$501.79 million on 30 September 2019. Netflix reported a negative free cash flow of -$551.76 million on the same day.
Tellingly, Netflix reported a financing cash flow of $11.99 billion on 30 September 2019. I think that means the only way Netflix can finance its operations is to borrow money. To explain, Netflix makes money by borrowing against cash it does not have.
So Netflix is making some money, currently. However, it is not generating cash which could to disaster.
To explain, I think all it will take is a big drop in subscriptions to send Netflix into the death spiral. The death spiral occurs when a company cannot make enough money to pay its debts.
Why Netflix could Never Pay a Dividend
I think investors need to stay away from Netflix (NASDAQ: NFLX) because Mr. Market grossly overprices it. To add insult to injury, Netflix pays no dividend and offers no margin of safety.
Furthermore, I think Netflix could never pay a dividend. To explain, you need cash to pay a dividend and Netflix generates no cash.
Thus, I advise investors interested in streaming video to investigate Disney (NYSE: DIS). Disney paid an 88₵ twice-a-year dividend on 5 July 2019. Mr. Market priced Disney at $132.92 on Monday, November 4, 2019.