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Investors Beware: The Office is Part of a Larger Netflix Binge-Watching Problem

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Netflix NFLX shares have jumped 38% in 2019, but have cooled off during the past three months. And now it appears the streaming TV giant could have a binge-watching problem.

NFLX’s Office Problem

NBC said Wednesday that it landed the domestic streaming rights for The Office. Starting in 2021, the hit sitcom will be available exclusively on NBC’s (CMCSA - Free Report) yet-to-be-launched streaming service, under a five-year deal. The loss of The Office two years down the line might not spell major trouble for Netflix but is indicative of a larger problem the streaming firm must correct.

Netflix and CEO Reed Hastings have for the last serval years spent billions of dollars on original content and will continue to do so as more companies start their own streaming services and pull their content. Many NFLX shows and movies have been successful, but its offerings don’t account for enough total viewing hours at the moment.

The Office is currently Netflix’s No. 1 show, according to multiple reports. Worse yet, only two of the 10 shows that U.S. subscribers spent the most time watching last year were Netflix originals, according to Nielsen data. Overall, library programming, which includes TV reruns licensed from other studios, accounted for 72% of total viewing minutes. With everyone from NBCUniversal to AT&T T and Disney DIS set to roll out their own streaming services, Netflix could have a serious problem on its hands.

 

 

 

 

 

Netflix needs people to feel they get their money’s worth on monthly plans that cost as much as $15.99. This could become harder if NFLX were to lose more of its binge-worthy content like The Office and Parks and Recreation. HBO has been able to thrive for years through a smaller set of prestige shows, documentaries and mini-series, along with some outsourced movies. This model is, of course, not easy to replicate.

Plus, Disney+ will feature both new and old movies and TV shows from arguably the biggest brands in entertainment, Disney, Pixar, Star Wars, Marvel, and National Geographic, all for $6.99 a month. Disney also controls Hulu and its ESPN+ streaming sports offering has performed well. Meanwhile, Apple is ready to debut its streaming service with A-list Hollywood stars both in front of and behind the camera. And let’s not forget Amazon Prime AMZN as it could stand out due to its ability to offer a combination of movies, TV shows, and live sports, along with Disney.

Outlook

On the positive side, Netflix closed the first quarter with 148.86 million paid streaming memberships. This staggering figure marked 25% growth from the year-ago period for the fifth straight quarter and helped Netflix remain the largest U.S. streaming company. Amazon claims roughly 100 million Prime subscribers, with Hulu at 28 million.

Looking ahead, Netflix expects to grow its global paid membership base by roughly 24% in Q2 to close at 153.86 million. Meanwhile, our current Zacks Consensus Estimate calls for the company’s full-year fiscal 2019 revenue to jump roughly 28% to reach $20.18 billion. This, however, would mark a slowdown from 2018’s 35% top-line expansion. Peeking further ahead, Netflix’s fiscal 2020 revenue is projected to jump 24.3% above our current-year estimate to $25.1 billion.

At the bottom end of the income statement, the firm’s adjusted fiscal 2019 earnings are projected to pop 24.6% to $3.34 per share. NFLX’s fiscal 2020 adjusted EPS figure is then expected to soar 75.3% higher than our 2019 projection. It is also worth noting that Netflix has crushed our quarterly earnings estimates by an average of 24% over the trailing four periods.

 

 

Bottom Line

Investors need to pay close attention to Netflix’s user growth both domestically and internationally, as these figures are likely to drive the stock in the near-term—especially with NFLX set to see its revenue growth slow. On top of that, the company’s ability to create its own The Office-style shows, which keep users hooked for hours, seems paramount.

Netflix is Zack Rank #3 (Hold) at the moment that still holds some sky-high valuation metrics. The company is trading at 108X forward earnings, against its industry’s 14.4X average. In the end, the streaming firm is likely to remain a strong company for years to come even though it faces real challenges and competition.

Shares of NFLX closed regular trading Thursday up 2.16% to 370.02 per share, down roughly 12% off its 52-week intraday highs of $419.77 per share. Netflix stock has fallen roughly 6% over the last 12 months, which lags the S&P 500’s 6% climb.

NFLX is currently scheduled to report its Q2 fiscal 2019 financial results on Wednesday, July 17.

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