By Karl Kaufman
Is the stock overvalued? Is there room for growth?
Daniel Lugasi: While many investors will focus on the sky-high P/E ratio of Netflix to determine whether the stock is overvalued, the better measure is to look at the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiple vs its peers. Netflix is growing EBITDA at a pace that is over 3 times faster than its industry peers, which would justify a growth premium for the stock.
This premium that the stock commands incorporates both the potential for subscriber growth and the economies of scale that will benefit the company as subscribers reach critical mass relative to content costs.
From a fundamental perspective, traditional value investors would agree that Netflix’s stock is overvalued, but when one incorporates the upside growth risks, Netflix may be deserving of a premium if they can deliver on continued growth in the future while managing content costs.
How will the company’s debt load affect its continued expansion?
Lugasi: Debt has the potential to clamp down on the growth rate of Netflix as the company will need to continue issuing debt to fund their content costs. Currently, the company has approximately $8.5 billion in debt outstanding with the need to issue more in the future. As interest rates in the U.S. move up, this could cause further distress for the company as content costs balloon. This cash burn, combined with rising rates could spell trouble if subscriber growth tails off.
What about competition?
Lugasi: In terms of competition, the only true barrier to entry into the streaming video subscriber model is the need for capital. Netflix really lacks a moat around their business model, which will make it rather easy for large technology companies to challenge them in this space.
Amazon has been one of the most prominent competitive threats, but due to the fact that Prime Video is bundled with Prime subscriptions, it is not a truly standalone threat to Netflix.
The company that has the cash to launch a true, standalone competitor to Netflix is Apple. Apple could outright purchase Netflix, but it would be more likely that Apple replicates the success of Netflix with their own product offering, which would include original content. This would parallel the launch of Apple Music in many ways and it is the only logical next step for Apple in the streaming content wars.