Netflix (NFLX -0.66%) is closing out at amazing decade.
Shares of the leading streaming network are up a whopping 4,180% since the start of 2010. The company has beaten Wall Street's odds, transitioning first from a DVD shipper to a streaming company and then to an original content powerhouse that has fully disrupted Hollywood.
But over the next decade, Netflix will face an entirely different set of challenges. Streaming has now gone mainstream, and the company needs to prove that the $15 billion-plus it's spending on content annually is going to pay off. Next year, especially, looks crucial for the company and could send the stock soaring or tumbling.
Here are three big questions Netflix will answer in a make-or-break year.
1. Will competition hammer its growth?
Netflix has faced streaming competitors before, such as Hulu (mostly owned and solely operated by Disney (DIS 2.46%)) and Amazon Prime, but the competitive landscape is changing dramatically. Apple's streaming network Apple+ and Disney+ both launched in November, and Disney+, in particular, poses a threat like nothing before it. The service racked up 10 million subscribers at launch and has a content library stocked with movies from Pixar, Marvel, and Star Wars, as well as Disney classics that are sure to appeal to families with small children. Disney also undercut Netflix on price, launching its service for just $6.99/month. A bundle with Hulu and ESPN+ goes for $12.99/month, the same as the most popular Netflix package. Early analyst research has mostly found that Disney+ is not a mortal threat to Netflix, but the competition will get even tougher when AT&T's HBOMax and Comcast's Peacock both launch next spring. The advent of those two streaming services means that Netflix will lose its two most-watched shows, Friends in 2020 and The Office in 2021, which will be a significant test for Netflix.
Keep on eye on subscriber growth throughout the year, especially in the January quarterly report following the Disney+ launch, as that will be the clearest indication of how the company is holding up against new competition.
2. Will Netflix finally win the Best Picture Oscar?
In its most recent earnings report, Netflix said that it has three movies that are generating Oscar buzz: The Irishman, Marriage Story, and The Two Popes.
Netflix has never won a Best Picture Oscar. Last year, Roma won the award for Best Director, as well as Best Cinematography and Best Foreign Language Film, but Netflix is making its biggest play ever for Oscar gold this year. The Irishman, directed by Martin Scorsese, is probably the top candidate, with a 3.5-hour run time, a $140 million budget, and a star-studded cast featuring Robert DeNiro, Al Pacino, and Joe Pesci. But management is clearly proud that it has three Oscar frontrunners.
Winning a Best Picture Oscar would be a long-awaited validation for Netflix. The company has poured billions into original content, but it's also been panned for serving up mediocre fare and criticized for undermining the traditional Hollywood "windowing" model where movies show in theaters for a set period of time, usually a few months, before arriving on DVD and streaming services. Big-name directors like Scorsese had been uncomfortable with the Netflix model, as they're used to measuring success by box office receipts and believe movies should be seen in theaters.
That The Irishman was made for Netflix shows that attitude's changing. If the company can win the Best Picture Oscar, it will show that Hollywood has fully bought into the model, and it could attract other top talents to make movies for the service as they can be confident it won't hurt their chances at winning prestigious awards.
3. Will the cash burn finally slow down?
Netflix's free cash flow is set to hit -$3.5 billion for 2019, a number that has caused more than a few naysayers to call for the stock's demise, claiming its model just isn't sustainable. To fund its content binge, Netflix has been burning cash for years, tapping debt markets to make up the difference. The streamer has racked up $12.4 billion in debt, which is costing it about $600 million in interest expense annually.
Management has said several times that its cash burn rate will begin to ease in 2020 thanks to its expanding revenue base and increasing operating margin. However, Netflix has not given free cash flow guidance for 2020. Investors are certainly hoping for that figure to narrow substantially, as it gives them confidence that the company can manage its finances in the face of rising competition without taking on more debt.
After spending $15 billion on content on a cash basis in 2019, investors are also wondering when content costs will begin to plateau, as the company is likely seeing diminishing returns from its marginal content spending.
If Netflix's cash burn does significantly slow, it will help shore up its fundamentals and bring its reliance on debt funding to an end.
Where does the stock go from here?
Even after Netflix's price surge last week, the stock is still trading down about 20% from its all-time high in July 2018, a sign that shares could still run higher with the right mix of positive news.
If Netflix passes all three of the above tests -- if it fends off new competition, wins the Best Picture Oscar, and take a solid step toward positive free cash flow -- the stock is likely to surge. However, if subscriber growth slows significantly or cash burn remains elevated, the stock could crash, as Netflix is still valued like a growth stock with a P/E ratio above 100.
Keep your eye on key events in January, as that should set the tone for the year. The Golden Globe Awards will take place on Jan. 5, giving Netflix a chance to capture one of two Best Picture awards, for comedy or drama, and pick up Oscar momentum. Then the company will report fourth-quarter earnings on Jan. 21, revealing the impact of the Disney+ launch on its subscriber growth during the key holiday period, as well as its outlook for the year, including free cash flow guidance.
No matter what happens, it's going to be a big year for the top streamer.