Netflix, the streaming service that is calling time on the era of traditional television’s dominance, saw its valuation breeze past $1 billion in afterhours trading on Wall Street yesterday. Markets reacted with enthusiasm to the company’s fourth quarter results and drove its share price up 8.4%, taking total market capitalisation to $109 billion.
Netflix is now behind only media conglomerate Comcast and The Walt Disney Company in size among the biggest media companies in the world, having seen its share price almost double over the past year. The highlight of yesterday’s results was the announcement that the company added 8.3 million new subscribers over the fourth quarter. Forecasts had been for 6.3 million. Fourth-quarter profit was posted at $186 million, more than double the previous year’s $67 million, on revenue that had also increased to $3.3 billion from 2.5 billion. The afterhours gains came on top of a 3.2% share price rise during market opening hours, which had taken the price to an already record $227.58.
Netflix both buys the rights to content from third parties and is increasingly producing its own shows. The company has allocated significant budgets to creating its own original content, with series such as Stranger Things, 13 Reasons Why and Chasing Cameron proving to be hits. Subscribers also have on-demand access to the entire back catalogues of most of the most popular content produced by other companies. Netflix invested $6 billion in creating its own exclusive content over 2017, and forward guidance indicates that will rise to around $8 billion in 2018.
One negative to the results reported yesterday was that this heavy investment in content has seen long term debt increase to $6.5 billion, from $4.6 billion just three months earlier. Marketing costs also rose to $420 million from $312 million.
On demand streaming services such as that provided by Netflix and rival Amazon Prime are quickly changing how we consume TV shows. Until very recently, programmed schedules dominating viewing habits but that has rapidly changed among younger demographics over the past few years. The budgets being dedicated to the production of television series also dwarf those of previous eras. This has led to what many are calling the ‘Golden Age of Television’, with quality widely considered by consensus to now be generally higher than that of cinema productions.
Those investing online in ISAs and SIPPs through online stockbrokers to have included Netflix and rival Amazon, have enjoyed significant success recently. Amazon’s share price has also been on a remarkable trajectory over the past few years, with recent growth also strongly connected to its own streaming service and investment into exclusive content.
One concern that some investment analysts do have is that the stellar share price growth of both companies is strongly tied to future prospects rather than current profits. Both are heavily investing in growth and increasing debt burdens. However, wider market consensus is that growth in market share and revenues is likely to continue strongly for the foreseeable future, supporting aggressive P/E ratios.
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