Can Netflix Stock Deliver Strong Gains Next Year?

New competition, increasing rates.. can Netflix still perform?


Just before the market experienced mess selloffs and subsequent declines, Netflix stock (NASDAQ: NFLX) was performing well. Netflix shares had doubled in the summer and there was no reason for the shareholders to second-guess the stock. Although, as the year continued there were concerns relating to slower customer growth and broader market corrections. These factors caused Netflix stock selloffs and the NFLX fell over 40% from its highs. While that is a significant drop, Netflix stock price is still up by 25% this year.

What Factors Could Disrupt Netflix Stock Gains?

Netflix’s growth is healthy despite possible challenges presenting themselves in 2019. We look at the most significant factors that could prevent Netflix stock from making strong gains next year.

Interest Rate Hikes

In recent years, Netflix has funded its large content library with cheap debt. In Q3, we saw Netflix’s long-term debt levels go past the $8 billion mark. Netflix also announced that it intended to raise another $2 billion to spend on further content. This brings Netflix’s debt past $10 billion.

In the past few years, interest rates have been incredibly low. This means that Netflix has been able to fund its content with inexpensive debt. The cheap debt that has been readily available to Netflix may be coming to an end as the FED recently announced further rate hikes. Netflix issued a bond in April ($1.9 billion) with a high yield of 5.875%.

The interest rate increases will cost Netflix significantly more as long-term borrowing will be subject to higher interest than in the past few years. To compensate for rate hikes, Netflix could slow down on content spending or have their bottom line affected. For Netflix stock, this signifies two possible outcomes which may cause selloffs.

Disney’s Streaming Service

Competition hasn’t been a challenge that Netflix has been troubled with in recent years. Although, Apple and Disney’s upcoming streaming services may take some of Netflix’s market share next year.

Out of all the competition that Netflix faces and is set to face, Disney is the most viable. Disney will be launching its own-brand tv streaming service in 2019, titled Disney +. The content that will be shown on Disney+ will be from four main studios; Disney, LucasFilm, Marvel and Pixar. The question is if the content that Disney+ can provide is enough to take some of Netflix’s subscribers.

It’s too early to see if Disney+ is strong competitor to Netflix, although due to its extensive content library there is always a chance that Netflix stock will suffer.

Extensive Content Spending

A major factor causing investors to be bearish on Netflix stock is its extensive content spending. Wall Street analyst Todd Juenger recently stated that he believes Netflix stock price recent declines can be attributed to poor negative free cash flow.

Despite Netflix outperforming new subscriber estimates in Q3, the company did see its free cash flow in 2019 drop lower than analysts expected. It is likely that content spending was the cause.

We expect Netflix to reach 300 million international paid subscribers by 2030. For comparison, at the end of 2018 Q3, Netflix had 137.1 million subscribers.

Netflix has performed outstandingly this year and it is likely that the company’s steady growth will continue long into the future. Although, due to the factors mentioned, we expect Netflix to face more challenges in the next 12-months than the previous.

Read: can Facebook stock deliver profits to investors in 2019.