The Netflix critics who point towards massive debt load and the unsustainable $12 to $15 billion annual content production costs causing a bleeding of free cash flow are not wrong to question these things. They are absolutely correct in thinking this company could be a ticking time bomb.
I’ve always avoided writing negative analysis on this company because I hesitate to think Reed Hastings doesn’t have plan. He’s one of the better entrepreneurs of the past decade as far as execution and hard-to-nail pivots.
Most naysayers refuse to recognize the wide margin Netflix has in OTT subscribers compared to the competing streaming services. This stands at 87% in the United States and 70% in developed, English speaking countries. They claim 50-60% in developed, non-English speaking countries.
Amazon Prime is supposedly in second place, yet they are entirely absent from the Top 20 most streamed shows. I don’t trust the numbers here as Prime is many things beyond OTT and some of these subscribers could have Prime for shipping or groceries, yet remain loyal to Netflix in their viewing habits. Of the Top 20 most streamed shows globally, Netflix claimed 19 of them (although the number should be adjusted for 17 shows as Disney’s Marvel counted for two of the rankings).
Despite the noise of new OTT entrants, the projections from unbiased analyst firms continue to put Netflix at a wide margin with 87% in the United States.
The real question is what will Netflix’s penetration be globally? Half of the world does not have broadband and many geos that do have slow speeds. I believe Reed Hastings is gunning to be the first truly global media company. The barrier to entry is high for global and the only other streaming service that has the ability to license content internationally is Disney.
If Netflix reduces its content bill over time (the company has stated this is the peak spending year), and meanwhile, simply keeps doing what it’s been doing on the execution front, it has the possibility to reach the majority of global households.
I do think they’ll have to offer a reduced subscription fee for catalog content and keep the higher subscription fee for premium and new content in order to fit global household budgets, but the numbers are there .
The slow proliferation of fast broadband and OTT has the market somewhat confused right now. The Untied States is far ahead with OTT accessibility and this has skewed how investors see this opportunity. They are not considering that Netflix’s biggest headwind is global broadband speeds. They are thinking this is a turf war in the United States, and therefore, the debt load looks prohibitive for only 150 million households.
You can read my entire analysis on Netflix here. my entire analysis on Netflix here.
I don’t get to choose the titles of those articles. If I could have chosen the title, it would have been “Get Netflix When It’s Dirt Cheap and while Broadband Penetration is Low.”
Below is some technical analysis from Knox on entry scenarios. If we reach his target number, we will update you.
This isn’t an earnings call. Netflix could beat earnings. I just think it’s pretty high risk with the market perception around OTT subscription services right now with Apple, Comcast, etc.
p.s. I have a PDF coming for you tomorrow on Telaria, the small cap focused on Connected TV ads.
Netflix Technical Analysis
by Knox Ridley
The Very Big Picture (Weekly Chart)
Going back to the beginning of its trading, the weekly chart of Netflix is interesting. To see a stock as explosive – in both directions – like Netflix, follow a uniform trend channel, as well as adhere to extensions on such a large time frame, actually shows a sense of order to its path upwards.
The blue roman numeral count shows the very large degree cycle count, which operates on a time frame that is not as useful to most investors. That is, unless we are coming close to the end of a wave and the beginning of another, which I do not see happening just yet.
My main count has us still within this larger degree 3rd Wave in blue roman numerals. This means, if we go to a lower degree of time within this cycle count, we are looking at the primary count in orange. This count will be more useful to us because we have topped out in Wave 3 and are correcting into Wave 4.
Third Waves are typically accompanied with a trend’s peak momentum, which is what we are seeing when looking at spike in the MACD. Being in a 4th Wave, there are a number of price clusters that could find final support.
There’s a confluence of extensions highlighted on the graph: the pertinent extensions to the cycle count in blue roman numerals are on the right in blue; (2) the extensions of interest to the primary degree count in orange is on the left in orange; (3) the 23.6% retrace level to the internal red count is also in red.
As you can see, there’s a confluence with these important points, which will be major support regions in any significant pullback. Also, keep in mind the 23.6% retrace level is on the chart to offer perspective on just how far Netflix can reasonably fall.
Please keep in mind we are talking about a primary degree count, which started in 2005, and in 2019 we are just now completing Wave 3. So, this correction could take weeks to months to play out. In the meantime, we can play the momentum on a lower degree, which is highlighted below.
Close Up
Zooming into the 2 hour chart, we get a better understanding of specifically where we are within this larger trend that is unfolding. We are in an A,B,C correction, where (A) bottomed at the December low in 2018, (B) peaked in June of 2019, and we are currently in the final (C) wave, which appears to be unfolding in a 5 wave pattern, and is highlighted by the red letters red.
Notice the RSI making higher highs, which is putting it into overbought territory (above 70), while the price action is making a lower higher. This is highlighted with the red circles, and is a negative reversal patter, which suggests more downside is on the horizon.
The final targets I have for this (C) wave push, is at minimum the $227.50, which will close the gap-up from January of 2018. However, the more likely target will be the A=C price around $212-$211. I would be interested in seeing how the stock holds support around this region, and see how the price behaves before committing. If this level does not hold, then the extensions in the weekly chart will come into play, and we could be in for a more aggressive correction.
Miracles do happen, and if we close above the $335 resistance level, which is highlighted just below the green arrow, I would consider Wave 4 over, and for us to be in the primary 5th wave push to all new highs. We feel this is unlikely due to the headwinds the company faces – some that are very real headwinds and some that are driven by perceptions.