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Netflix Banks On Local Language Original Content To Retain Its Market Leadership

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Netflix, Inc. (NFLX) is the leader of the global over-the-top content streaming industry with over 203 million paying subscribers. The company enjoys first-mover advantages as Netflix was the pioneer in popularizing the concept of content streaming, but competition for market share in this lucrative space has intensified over the last few years.

Netflix, through the end of 2019, was able to successfully thwart the threat of rivals such as Amazon’s (AMZN) Prime Video and Hulu thanks to its content library. However, Disney+, which was launched by The Walt Disney Company (DIS) in late-2019, has emerged as a formidable competitor, with it surpassing 100 million global subscribers in just 14 months, a feat that took Netflix nearly a decade to achieve.

With competition becoming a larger threat, Netflix has decided to pour billions of dollars into creating content in local languages in strategically significant markets such as India, Eastern Europe, and Latin America, which is likely to drive earnings growth in the next few years.

The Road Ahead Will Be Bumpy

Netflix can no longer expect to add and retain new subscribers without producing original content consistently. Although the company was not challenged for many years, the macroeconomic environment is rapidly changing.

A recent survey conducted by Hub Entertainment Research found that 77% of Disney+ subscribers who joined the service during the pandemic said they would renew their subscriptions, versus just 73% for Netflix. These results are a testament to the customer stickiness and the brand value enjoyed by Disney and are indicative of the challenges Netflix will face in the future to retain its market leadership.

On top of this, Netflix is likely to come under pressure as a result of the recent initiatives taken by studios to develop their own content streaming platforms. According to a recent Bloomberg article, Comcast Corporation (CMCSA), which owns Universal Studios, is considering pulling its movies from Netflix in a bid to strengthen its own streaming service, Peacock. If Comcast goes ahead with the plan, Netflix could lose the rights to popular movies like Despicable Me as early as the end of this year, which would be a major blow.

Considering these recent developments, Netflix most likely won’t be able to grow at the same pace it did during the last decade.

Original Content To The Rescue

The U.S. is the largest market for Netflix today, and the company is now laser-focused on international markets as the U.S. content streaming industry approaches maturity. Netflix’s strategy is to create content in local languages. In the coming months, Netflix is planning to bring movies and TV shows like Barbarians (Germany), Sweet Home (South Korea), Selena: The Series Part 2 (Mexico), Alice in Borderland (Japan), and the second season of Lupin (France) to its platform in local languages, which could pave the way for better-than-expected subscriber additions internationally.

The onset of the COVID-19 pandemic forced Netflix to halt production, but the company is now actively producing content. Netflix CEO Reed Hastings, in his quarterly letter to shareholders dated January 19, 2021, confirmed that at least one new movie will be released weekly in 2021. The company, therefore, can be expected to incur significant content production costs this year, but these costs are necessary to navigate the competitive industry landscape.

Analysts Weigh In

Looking at the consensus breakdown, 24 Buys, 6 Holds and 4 Sells have been assigned in the last three months. So, the consensus rating for Netflix is a Moderate Buy.

Meanwhile, the average analyst price target is $618.88 per share, which implies an upside potential of 11% from the current market price. (See Netflix stock analysis on TipRanks)

Takeaway

Netflix is richly valued given its forward P/E ratio of 42.75. However, if the company succeeds in securing its market leadership position, the share price could reach the high end of analysts’ estimates as profitability is likely to increase sharply.

What’s more, the macroeconomic outlook is favorable considering the expected increase in internet penetration in densely populated regions such as Asia and Latin America.

Although the competition is intensifying, Netflix is producing local language content at a faster pace than its peers, which could give the company a sustainable competitive advantage in the long run.

Disclosure: The author was long Disney shares at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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