This is an update to the original article: Netflix Stock Fades as a New, Abrupt Risk Appears
Owning Netflix stock now is owning an investment in a different company than just a few months ago. These are the facts, and they are not disputed.
We will see great growth internationally for the next few quarters, but make no mistake, Netflix may be going through the largest pivot any large cap tech firm has gone through in a decade and the implications are huge. Further, the poor showing at the Emmy awards has reminded people rather abruptly that a content creator is a totally different company than a content distributor with technological disruption and Netflix simply is not the best in the world at the former, and its business is now moving abruptly in that direction.
Netflix (NFLX) is now down more than 25% from its highs, which puts it well into "official" bear market territory. But this isn't about a short-term gyration due to the stock market's overall correction. We now see a risk unlike any before for Netflix. It's the risk that the company is moving away from its core competency; and the truth is, that may be its only choice. Netflix is quickly losing pricing power over pure redistribution as Amazon steps into the mix.
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Netflix has become a colossal success because it has broken all of technology as a distributor, forever changing the way we watch TV and movies. It has won the war, and fended off some very powerful companies to do so, making them look foolish in the process. But, Netflix is now relying more on original (exclusive) content than it used to as it has been dropping a substantial amount of other content.
In fact, Netflix just announced that thousands of movies will be removed from the US platform after not renewing a deal with distributor Epix. While NFLX points to the fact that so many other platforms already have the content so its not a competitive advantage (or need), oddly Hulu said "our subscribers have been asking us for more, and more recent, big movies" (Source: BBC News).
But this is the enormous pivot the company is making: "Today about ten percent of the content available on Netflix is either licensed or created by the company. It plans to increase that number to fifty percent" (Source: https://www.scottfearon.com/). Even though NFLX has done exceptionally well in this new realm, we simply must ask ourselves if the company's story is as compelling if it's an original content creator, rather than a technology disruptor through distribution. It's a fair question and one all shareholders should be asking themselves.
There is a serious new threat from Apple (AAPL), which has stepped into the fray with Apple TV. Barron's reported on Global Equities Research's Trip Chowdhry when he said that the Apple TV platform "provides strong indication" that Apple TV will come with its own software development kit and its own app store, i.e. its own Apple TV ecosystem. And there's the problem for Netflix, he argues, since in this ecosystem Netflix would be just another app, or a "second-class citizen." (Source: New Apple TV Platform Is Bad News For Netflix: Global Equities)
Before we lose our minds over the risk, let us not forget that the entire market is in correction mode and it's not uncommon for some of the stocks that have done the best to then be hit the hardest in the short-term.
We must keep our eye on the first item. Owning Netflix stock now is owning an investment in a different company than just a few months ago; it has shifted away from technology in a major way. Let us also remember that every time Netflix has faced a seemingly existential threat, not only has it beaten back the threat, it has become bigger, better and stronger for it.