With competition intensifying,
needs more show stoppers. Unfortunately, those come at a high premium these days.
The streaming giant will report second-quarter earnings Wednesday. While investors are likely in for a smooth performance for now, the company’s longer-term outlook holds a lot more suspense.
Wall Street is forecasting revenue growth of 26% from a year earlier to $4.9 billion, with more than 5 million new paid subscribers expected to be added to the company’s rolls. But the third quarter is expected to be an even bigger hit, thanks to new seasons for several of the company’s most popular shows, including “Stranger Things” and “Orange Is The New Black.” Analysts project about 7.7 million new subscribers for the quarter ending in September.
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As investors look into next year and beyond, though, things start to veer off script. While Netflix is the clear industry leader with roughly 150 million paid subscribers world-wide, choice in streaming services increasingly abounds. New services from the likes of
Those older shows still count for a lot. An analysis by Nielsen and The Wall Street Journal found that licensed shows top Netflix originals in terms of minutes streamed. Nielsen estimates that “Friends” was the second most-watched show on Netflix last year after “The Office.”
The good news is that Netflix originals are resonating. The latest “Stranger Things” season that dropped on July 4 was viewed by more than 40 million households in its first four days, according to the company. That means roughly a quarter of Netflix’s global paid subscriber base watched the show.
But originals don’t come cheap. In 2013, Netflix spent a reported $4.5 million an episode when it began making “House of Cards.” Today that almost looks like chump change; new shows in the works by competitors are costing between $8 million and $15 million per episode, according to The Wall Street Journal. Netflix has burned cash for the last seven years and expects to blow through about $3.5 billion this year.
That clearly can’t go on forever. The company did say in its last quarterly report that it expects free cash flow to improve next year and beyond. And not having to shell out for big licensed shows does save money, though it also raises the pressure to keep rolling out its own hits.
Netflix commands a rich multiple of 82 times forward earnings precisely for its success at continuing to rack up new subscribers. The biggest risk is that growth could slow as newer competitors with deeper pockets throw money toward establishing early market share. Increasing competition in other new industries like ride-share and food delivery have likewise weighed on early movers’ profitability and cannibalized growth.
While it might seem improbable for the hold of such a dominant player like Netflix to be loosened, stranger things have happened.
Write to Laura Forman at email@example.com
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