When a company's name turns into a verb, you know it's hit the market. While it's not there yet, Netflix is getting closer to such an achievement.
Today, the company makes billions in subscription revenue and specializes in online TV streaming. However, it is expanding into new ventures while maintaining life support for its original business.
Netflix's past
In 1997, Reed Hastings and Marc Randolph started Kibble, a DVD sales and rental service. The company, which operates out of Scotts Valley, California, switched to the DVD rental business model almost immediately. According to the story, Hastings saw an opportunity in the physical advantages that DVDs had over the clunky and fragile videocassettes, making them suitable for mailing.
Two years later, in 1999, the company began offering an online subscription service over the Internet. Customers could choose from tens of thousands of movie titles shipped from more than 100 distribution centers via postal delivery and postage-paid return envelopes.
But it wasn't until 2007 that the company began offering streaming services over the Internet and quickly expanded through partnerships with companies that supported such infrastructure - from Blu-ray players to video game console makers. In 2010, the company began to expand internationally and is now active in over 190 countries.
The gift of Netflix
While the tech sector has been under pressure for some time, Netflix was one of the companies leading the decline.
Over the past decade, the company has generated compound annual returns in the triple digits, but is now facing slowing growth as new subscriber rates continue to stagnate.
The problem arose as competition accelerated to catch up with the leader and punish seemingly out-of-control valuation. At its peak, the stock traded in the double-digit price-to-sales ratio.
But after a relentless sell-off, activist investor Bill Ackman took a $1.1 billion stake in the company. The move is a positive sign as investors expect Ackman to push management into taking more decisive action.
The future of Netflix
Hopes, dreams and activist investors may spark interest, but only precise action will bring about a sustainable recovery.
With growth prospects slowing, Netflix is exploring other markets. The company just acquired video game developer Next Games for €65 million. This Finnish studio is famous for its mobile game adaptations based on the TV series The Walking Dead.
Additionally, the company is scouting for more film adaptations as it partners with Take-Two Interactive Software Inc. (NASDAQ: TTWO) to produce a film based on BioShock, a sci-fi game series that has grossed over 39 million times was sold.
Finally, the company is moving further into the interactive realm and plans to launch Trivia Quest on April 1st. The series will have 30 daily episodes with 24 questions split equally between Standard and Hard. Viewers select their answers on a multiple choice basis.
From this point of view, Netflix sees the future as mixing subcultures even more to expand the overall addressable market while driving more immersive and interactive content.
How Netflix makes money
Netflix has strayed far from the original film mailing business. This is how the company makes money these days.
Digital Subscriptions
This segment is the primary source of income. Netflix currently has 222 million subscribers who pay for one of three tiers:
Basic plan: $9.99 per month for one device.
Standard plan: $15.49 per month for two devices.
Premium plan: $19.99 per month for up to four devices and Ultra HD quality.
While subscription fees vary by location, some content also varies by location as licensing could prevent distribution.
DVD rental
Surprisingly, the company still retained physical film distribution. They also operate the service in tiers:
Standard: $7.99 per month for one title at a time
Premier: $11.99 per month for two titles at the same time
Blue-ray: $14.99 per month
Although the number of DVD rental subscribers has declined, it still had around 2 million subscribers in the US at the end of 2020.
Interestingly, in 2011 the company's attempt to spin off the DVD service into a separate company (Qwikster) failed.
Netflix stock price
If you look at the Benzinga Pro Netflix chart, you can see the speed of the recent decline.
Netflix Stock Chart 2017-2022, Source: BenzingaPro
It broke two key support levels and essentially fell 50% from the top. Although there was a modest rally in February, this move should not be classified as anything other than a dead cat's bounce - a pullback after a severe decline.
Looking ahead, the decline doesn't appear to be over as the stock could fall another 10% to 15%, especially if the broader market continues to weaken. From a technical standpoint, a bullish thesis should be resumed once the stock closes above the $450 level.
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Netflix: The C Suite
Behind a successful company stands a successful management. These people are responsible for the founding and growth of Netflix:
Reed Hastings, Co-Founder and Co-CEO: Hastings, a Stanford graduate and former software engineer, conceived a subscription-based movie rental service after paying a hefty fee for a videocassette rented in-store. He has served as CEO since Netflix launched.
Theodore Sarandos, Co-CEO: Cultivating a love of the entertainment industry from an early age, Sarandos became branch manager of Arizona Video Cassettes West chain and later vice president of West Coast Video. He joined Netflix in 2000, eventually becoming co-CEO and chief content officer responsible for Netflix's original content.
Spencer Neumann, CFO: A Harvard graduate and entertainment industry veteran, Neumann spent most of his career at Disney, eventually becoming CFO and executive vice president of Walt Disney Parks and Resorts. Before joining Netflix, he was CFO at Activision Blizzard.
Gregory Peters, COO & CPO: A Yale graduate with degrees in Physics and Astronomy, Peters has held various senior positions in the software and entertainment industries. He joined Netflix in 2008 and oversaw product development and business development overseas in Japan before rising to the current position in 2017.
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