Beset by serious challenges on two fronts, shares of Netflix Inc. (NFLX) may lose 50% of their value by 2020, Barron’s reports. On one front, Netflix faces a major loss of content when The Walt Disney Company (DIS) launches two streaming services of its own in 2019, and thus ceases to be a supplier to Netflix, as described by the Los Angeles Times. On the other front, Netflix faces increased competition as Facebook Inc. (FB) enters the video streaming market. Netflix already has to contend with the Prime video service from Amazon.com Inc. (AMZN). If that were not enough, Alphabet Inc. (GOOGL), the parent of Google, also has indicated that it plans to invest in video streaming, Barron’s says. (For more, see also: How Amazon, Facebook May Crush the TV Networks.)
Netflix has a key „plot flaw,“ according to Barron’s. The company primarily rents its content, rather than owns it. As a result, it is vulnerable to decisions such as Disney’s to stop renewing these rental agreements, or to increase the price of a renewal dramatically. Additionally, while Netflix Originals are growing in number, these shows also are mainly licensed by Netflix, rather than owned by it. Moreover, „many of the best content owners already have deals with other streamers,“ Barron’s adds.
The accelerating costs of acquiring content are causing Netflix to use up cash at an increasing rate. Its cash burn rate has risen from $900 million in 2015 to $1.7 billion in 2016, with something between $2 billion and $2.5 billion forecasted for 2017, Barron’s says. This is causing Netflix to pile up debt, mainly with junk bonds. Another sidebar to the plot, per Barron’s: Netflix also rents its streaming infrastructure from other companies, including Amazon.com.
A spokesman for Netflix asserts that no single vendor accounts for more than a few percentage points of viewing, thereby trying to calm fears about the coming loss of content from Disney. Meanwhile, The Motley Fool believes that the Barron’s story is unduly pessimistic.
They point out that Netflix has continued to thrive in the face of competition. Its subscriber base has more than quadrupled in the six years since Amazon.com has been making its own video streaming service a free benefit for its Prime shoppers, for example. Also, YouTube has been around longer than Netflix streaming, and has not hampered the latter’s growth, The Motley Fool also notes that Netflix has a proven ability to raise prices, and its „market dominance makes it a top draw for content creators.“