Like viewers of The Crown, Narcos and all the best TV box-sets, investors in Netflix just can’t get enough. Every new instalment of the company’s quarterly results is savoured and pored over by shareholders like screen addicts awaiting the next cliffhanger ending.
In this week’s episode, there was no shortage of excitement. In fact, Netflix blew out the lights, revealing a 40 per cent surge in revenues to $3.7 billion in the three months to March. That was the fastest quarterly year-on-year increase since the streaming service was launched.
With 125 million customers worldwide, including nearly 57 million in the United States, net income also rose by 63 per cent to $290 million as faster than expected growth in subscriber numbers and an increase in fees fuelled bumper earnings.
With consumers increasingly watching films and television shows via on-demand streaming rather than traditional models of advertising-funded viewing, Netflix seems to be on a roll, which is putting the fear of god into established Hollywood giants such as Disney. This week, Netflix set alarm bells there ringing while titillating shareholders with revelations about its future plans to invest $8 billion in original content including global TV shows, a new season of Jessica Jones and the launch of a David Letterman show, as well as a string of movies.
It also announced other juicy titbits. Subscriber growth reached 7.4 million for the first three months of this year, smashing forecasts by about a million. The increase was driven by subscribers outside its core American market, with 38 per cent and 55 per cent rises in the number of American and international subscribers, respectively.
The company’s shares, which have gained 60 per cent this year and are the top performer in the S&P 500 index, were up 9.8 per cent yesterday at $337.75. The shares had reached a “record” high of $333.98 last month.
With a market value of $143 billion, Netflix is already not far off the value of traditional media giants, such as Disney at $152 billion and Comcast at $154 billion. Buyers who tucked in when The Times last tipped the shares at $192 in November 2017 will have enjoyed a 71 per cent rise in prices, not bad for a five-month investment — but every long-running TV series reaches a point at which the script grows stale and viewers start to switch off.
How long can Netflix sustain its present blockbuster run? Certainly, the company has no shortage of growth opportunities — especially in international markets, where it remains under-strength. Deals with mobile providers such as T-Mobile, Verizon and the cable operators are also extending its reach into new markets.
Yet Netflix faces challenges too. The technology company has built a fabulous business by adopting an Amazon-style formula: spend big on exclusive content now to establish a dominant global network and raise prices later. So far, that strategy has worked out well, but the group is racking up high levels of long-term debt: $21.9 billion at September 2017, up from $16.8 billion at the same time the previous year. That could become a problem when it starts to face competition in the form of new rival streaming services from Disney and others. Netflix also may struggle to expand in the Chinese market, where it has tussled with regulators and has been forced to strike a licensing deal with a domestic player.
All in all, while Netflix still has a bright future, this seems to be a good time to take profits after a spectacular run in the shares.
ADVICE Sell
WHY A spectacular rally since Tempus last tipped the shares in November makes this an excellent time to take profits.
Majestic Wine
In these febrile markets, it does not take much for investors to take fright and send a share price plunging. So it was with some degree of nervousness that Rowan Gormley, Majestic Wine’s chief executive, uncorked a plan to double investment in acquiring customers and take a bite of £2 million to £3 million out of its 2019 profits.
Sure enough, the shares initially lost their fizz, falling by 5.4 per cent. However, as the investment community got its head round what the wine retailer was proposing, the share price did a swift U-turn and closed 9.6 per cent higher at 435p.
It helped that Mr Gormley, the consumate salesman, had managed to head off the early negativity by describing in detail how doubling its present investment to as much as £24 million would generate compelling growth.
When the South African-born entrepreneur took the helm in 2015, after selling his Naked Wines online business to Majestic for £70 million, one of the first things he did was put a stop to opening new stores and sort out retail basics such as product range, pricing, store layout and staff retention. He also set about expanding Naked in its core British, Anmerican and Australian markets.
Mr Gormley does not need reminding that about 18 months ago a direct mail campaign for its US Naked Wine business fell flat, contributing to a profit warning. The company has learnt its lesson and has provided clear visibility on strong returns from its increased investment, most of it in Naked.
Customer recruitment is switching away from traditional advertising to digital channels such as Facebook and Google, where investment can be targeted and returns measured swiftly and accurately.
While the hit on 2019 profits is disappointing, the reassurance on dividends and current trading in the face of a tough backdrop is very encouraging and backs up Mr Gormley’s confidence in what he’s doing. If he can achieve the returns he’s targeting for Naked, the medium-term growth prospects would be exciting, while early indications from a more modest investment in its Majestic retail business suggest that this could deliver similar returns.
ADVICE Hold
WHY Investors should keep faith with chief executive
