Netflix Inc. is an online media company for streaming TV shows, and movies. Netflix has grown to over 69 million members, in over 50 countries. Currently, there is over 100 million hours of content on the Netflix website. Content includes movies, feature films, and original series.

In the past year, the Netflix stock, NASDAQ: NFLX, has gained 111.15% (as of October 26th). As this online media company continues to grow, it begs the question, is it a worthy long term investment?

Business Model

In 1999, Netflix switched over to a subscription-based business model, where consumers are given access to unlimited rentals at a low monthly price. This provided Netflix with an advantage to cater towards movie-lovers. Around 1999, Blockbuster was one of Netflix’s biggest competitors. They offered the same service – the main difference was the business model, Blockbuster offered movie rentals, at a price per film, whereas Netflix offered unlimited movie rentals at one low monthly price.

Currently, the majority of Blockbuster’s brick and mortar stores have closed down. This is due to their lack of investment into changing their business model, such as offering movies online. Unlike Netflix, Blockbusters did not take advantage of the general shift to digitalization. Netflix took advantage of digitalization through partnering with consumer electronics, such as PS3, and Apple.

Hulu is a competitor of Netflix, as it also provides video streaming. Although the prices are similar, Netflix does have one advantage over Hulu: content. “Netflix has more. Hulu gets content faster” (Geek). Hulu offers two plans; Limited Commercials for $7.99/month, and No Commercials for $11.99/month. Hulu has the competitive advantage of streaming current season episodes – which are available the next day. However, Hulu does not have as much content as Netflix.

Netflix features & pricing – each plan comes with a free first month

Image Source

Marketing

Netflix’s total membership grew 11.08% from Q1 to Q3, 2015. As of Q3, Netflix has 69.17 million members. This is mainly a result of an effective marketing strategy. According to the Q1 Letter to shareholders, Netflix has a focus of promoting original content. According to the international marketing tests conducted, content focus aids member acquisition (Netflix).

As of Q3, Netflix has invested a total of $208,102 in Marketing, which accounts for 11.97% of Netflix’s Q3 revenue. Netflix continues to have a bigger proportion of marketing dollars invested through online marketing, as they are able to effectively achieve the right target market.

“Netflix and Chill” is a good example of a common phrase on social media. This specifically refers to to watching a film on Netflix and “chilling” with a friend. This phrase has gone viral on social media, providing Netflix exposure to their brand.

Financial Indicators

With a 11.08% YTD growth in membership, do the Netflix financial statements live up to it’s expectations?

Some Key Indicators include…

• Inelastic demand; raised HD 2-screen monthly price plan in Europe, by one Euro, without negatively impacting growth
• Expanding into South Korea, Hong Kong, Taiwan, and Singapore in early 2016
• Continuous investment in increasing content

Source: Netflix

Quarterly Earnings: Q3

Image Source: Netflix

Earnings Per Share

As seen in the Financial Statements, EPS has declined from $.19 in Q3 ’14 to $.07 in Q3 ’15. It’s also predicted that EPS will continue to decline to $.02 in Q4 ’15. However, the revenue is increasing each quarter. This inverse relationship is a result of the increasing outstanding shares – leading to the profits to be split among more investors.

The only way for Earnings Per Share to increase with the revenue growth is if Netflix stops increasing the number of shares outstanding and/or start buying back shares. Having less shares outstanding would be beneficial for investors, as there would be a higher EPS, if all else is constant.

Regardless of the declining EPS, Netflix has outperformed the markets, gaining over 110% YTD.

Image Source: Google Finance

Conclusion

Netflix and Buy? For long-term investors, Netflix is definitely a stock worth considering, as it continues to invest within quality content, and marketing in order to keep the number of members growing.  The one downside of the Netflix stock is the declining Earnings Per Share, which suggests that Netflix is issuing shares at a faster rate than revenue growth.

In the past, Netflix has outdone many of its competitors, from small video rental brick and mortar stores, to Blockbuster.  Netflix has a sustainable strategy of offering unlimited content for a low monthly price, providing the company with a strong competitive advantage.

Stocks mentioned: NFLX

Writer: Jelani Smith

Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.