Netflix (NFLX) posted a second straight quarter of impressive (albeit Covid-induced) subscriber growth in its most recent results. The streaming services has undoubtedly been one of the biggest beneficiaries of months of lockdown - but can its winning streak continue?
Morningstar senior analyst Neil Macker increased his fair value on the stock to US$200 (£153.13) from US$160 (£208.98), to take into account growing revenues as a result of a growing subscriber base. But the world’s largest streaming service remains a one-star stock, overvalued by some 150%, with an uncertainty rating of “very high”.
However, while shutdowns and social distancing have helped Netflix boost its subscriptions, Macker points out that the threat of newcomers such as Disney+ (DIS) and HBO Max (HBO) could thin its audiences.
“Despite subscriber additions coming well ahead of our estimate and guidance, revenue was in line with our projections for the quarter,” he says. “We still view much of the subscriber beat as a pull-forward of longer-term growth and expect the global rollout of Disney+ and the recent launch of HBO Max to increase churn.”
Fast Growing Subscription Base
According to Morningstar analysts, Netflix's non-US paid subscriber base is forecast to expand to 200 million by 2024. The company has successfully managed to attract new customers by adding more content – it added some 10.1 million streaming subscribers from April through June alone, while the pandemic forced people around the world to shelter at home.
That growth means the service - which charges between £5.99 and £11.99 per month in the UK - now reaches nearly 193 million paying online customers, up from 152 million a year ago.
But Morningstar analysts are less bullish about future growth. For July through September, Netflix forecasts it will add some 2.5 million new paid streaming customers around the world, but analysts had, on average, expected growth of 5.3 million.
“Growth in the quarter was spread across the four global regions, with each handily beating their comparisons from a year ago,” says Macker. “However, the US was the only region to post more customer additions quarter-over-quarter as the lockdown has lingered in the US longer than in other countries.”
Macker also points out that customers are more price-sensitive than previously thought, and competitors like Disney+ are already undercutting Netflix's prices. “We believe this price differential will cause lower subscriber growth than we had previously expected,” he says. “We expect that Netflix will not make any major price hike in the next few years due to sensitivity around the economic impact of Covid-19 and the impact from increased competition.”
At the end of the day, cost, convenience and competition are the main risks that Macker sees as a threat to Netflix. For one, technological advances mean viewers will be able to download content and watch on television or on another device.
This article originally appeared on Morningstar Australia
