Does Netflix, Inc. (NASDAQ:NFLX) Have Potential for Future Growth?

October 13, 2017, 10:48 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Netflix, Inc. (NASDAQ:NFLX) recently announced an increase in prices for its streaming services, which resulted in a rally in the company’s stock price. The rally was also sustained by the fact that two analysts revised their subscriber outlook for the company saying that it will surpass previous estimates.

The question on most investors’ minds is whether the company’s current performance is an indicator of its future growth potential. Many investors and analysts must be asking themselves whether Netflix can sustain its current performance despite increasing competition in the online streaming industry.

Some analysts believe that Netflix’s current trajectory does not inspire confidence in its future performance given that most of its past growth was largely due to lack of competition. There is growing competition in the online content streaming market as new entrants such as Roku Inc (NASDAQ:ROKU) and Walt Disney Co (NYSE:DIS) launch new streaming services.

The company has also invested heavily in the development and production of original content, which has reduced the company’s operating margins and free cash flow levels. It is not clear whether producing and streaming original content is a smart move for the company, which previously exclusively streamed content from other producers.

A significant number of original content producers such as Fox have pulled their content from Netflix’s platform citing unfair competition from the company’s original content. This has made the streaming service lose its previous appeal where subscribers could access content from numerous producers at a small monthly fee.

Netflix faces stiff competition from other streaming services that are priced at similar levels such as Amazon.com, Inc. (NASDAQ:AMZN) Prime Video, CBS Corporation (NYSE:CBS) All Access, Hulu and Apple Inc. (NASDAQ:AAPL) music service. This means that the company’s pricing power over its competitors has declined significantly, which could affect its market dominance as subscribers currently have more options.

The company is also richly valued as it is currently trading at a GAAP P/E ratio of 241.48, which is almost ten times the S&P 500 average P/E ratio of 24. This means that investors are taking on excess risk when buying the company’s stock at its current valuation.

To find out more about where we believe Netflix stock is going to go in the future, download our free custom trading report on the company.

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