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3 Reasons Investors Don't Need to Worry About Netflix's Growth

By Jeremy Bowman - Jan 24, 2020 at 8:23AM

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Reports of Netflix's demise have been exaggerated.

Investors are getting jittery about Netflix (NFLX 3.55%)

With an onslaught of new competition, its growth rapidly slowing in its most mature and profitable market, and a business model that's still burning billions in cash each year, Netflix has a lot of questions to answer as it turns the page on a new decade.

The stock is still down about 20% from its all-time high in mid-2018, and investors may be wondering if Netflix's best growth days are over.

However, on the latest earnings call, CEO Reed Hastings and his executive team sought to reassure the market that the streaming giant still has a lot of room to run. Despite the changing landscape in the streaming industry, there are still several reasons why Netflix's growth should continue unabated. 

The Netflix menu featuring Stranger Things.

Image source: Netflix.

1. Viewing time per member is still growing

There's no greater indication that Netflix is offering value for its members than viewing time. On multiple occasions, Hastings has said that Netflix and its competitors are ultimately competing for time, and he once went as far as to call sleep one of Netflix's competitors.

That's why it's an especially promising sign that subscribers are spending more time on the service. Here's what Hastings had to say on the call: "What we saw across the board is that our viewing, our per-membership viewing grew not just globally, but in the U.S. through Q4 and continues. So that bodes well for our long-term opportunity as long as we keep getting better."  

Even in the fourth quarter, when both Disney+ and Apple TV+ launched -- with Disney in particular wowing the market with 10 million sign-ups on opening day -- Netflix was able to coax its members into spending more time with its service. That bodes well for the company's ability to retain subscribers and add new ones.

2. Streaming industry growth is still coming from linear TV

For years, Hastings has played down threats from competing streaming services, maintaining that Netflix's real competition was linear TV. The Netflix chief predicted several years ago that internet TV would grow every year for the next 20 years while linear TV would shrink. That prediction has largely come true so far, and Hastings continues to see the disruption of linear TV as being the principal opportunity for streaming services like his own and rivals like Disney+.

Commenting on the subject, Netflix CFO Spencer Neumann said, "Disney+ has a lot of great catalog product and one big new show, Mandalorian. And it primarily is going to take away from linear TV and takes away a little bit from us. But again, most of the growth in the future is coming out of linear TV." 

Considering that most Americans still subscribe to cable or satellite TV and traditional pay TV remains popular around the world, there is still a tremendous opportunity for Netflix and other streaming services to take share from broadcast and cable TV.

3. Netflix keeps getting better

Less than five years after Netflix released its first original film, the streamer topped all other studios in Oscar nominations with 24 this year, including two Best Picture nominees. In 2018, Netflix led in Emmy nominations, also just five years after it launched its first original series.

In other words, Netflix has taken Hollywood by storm, going from a DVD-by-mail operator to a studio giant in less than a decade. Hastings doesn't see the company plateauing anytime soon. Here are his thoughts on the path forward over the next few years:

So if you think about the next couple of years, it's really the rate of improvement. That's the big thing, how much we're learning, and we're doing so many shows, our learning is higher; doing so many product tests, our learning is higher. And the quality of our service two or three years from now will be so much higher than it is today. That's the thing that's not well understood; everyone focuses on how's the current service look as opposed to how good we're going to be in three years.

Hastings is still playing a few moves ahead, building out the service for the future. The company's Oscar nomination haul is yet another way to recruit more talent and make better content. That should pay dividends in the next few years, along with Netflix's local content strategy, which is leaps and bounds ahead of any other streaming service. 

The streaming world may be changing, but Netflix remains the clear leader. Though competition and other challenges may present speed bumps, Netflix is still executing and continually improving. The company's growth days are far from over.

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