As Netflix Value Rises Toward $200 Billion, Program Costs Loom

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Netflix Inc.’s (NASDAQ: NFLX) market cap is $176 billion at $410 a share. Several analysts believe it will go much higher. The regular knock on the stock’s value is not the rise in Netflix subscriber count. The criticism is that it is in a war with studios and other tech companies for a lead in original programming.

Along with new producers of TV shows and movies, Netflix has competition from Apple Inc. (NASDAQ: AAPL), Amazon.com Inc. (NYSE: AMZN) and Hulu. The arms race is not new. It has gone on for several years, with Netflix the likely leader in dollars invested. A prime example of what these companies pay for talent is the recent Apple deal with Oprah. She must have been offered tens of millions of dollars, or more, based on industry partnerships to get top talent.

Netflix says its commitment to programming is above $10 billion for the next three years. Its revenue in its most recently reported quarter was $3.7 billion, up from $2.6 billion in the year before. Its forecast for revenue in the current quarter was $3.9 billion. Despite the rise in revenue, Netflix margins are tiny. It had net income of $290 million in its latest quarter, compared to $178 million in the year-ago period. The idea that a company that may make as little as $1 billion this year is worth $200 billion is considered absurd in many circles.

The presumption is that Netflix original programs increase its subscriber base and help retain current subscribers. Churn in subscribers is among the largest enemies streaming services have. However, Netflix has never drawn a credible line between its own programs and subscriber count or churn. How many of its 119 million subscribers have started the service, or kept it, because Netflix has dozens of its own shows, some of which have won major awards? How many subscribe or stay because of movies and TV shows Netflix offers from traditional TV and movie producers?

Netflix’s market value may reach $200 billion, but even a small misstep in its strategy to produce its own programs could quickly hamper that.