April 18, 2017 / 1:03 PM / 3 months ago

Netflix content crown begins to fit comfortably

3 Min Read

An illustration photo shows the logo of Netflix the American provider of on-demand Internet streaming media in Paris September 15, 2014.Gonzalo Fuentes

NEW YORK (Reuters Breakingviews) - Netflix's content crown is starting to fit a bit more comfortably. In its first quarter, the video-streaming service led by Reed Hastings missed subscriber estimates yet still managed to grab nearly 100 million customers worldwide. The plan to spend billions on films and TV series like “Stranger Things” is helping to lift its base. But it’s still far from able to justify a stock trading at 130 times this year’s estimated earnings.

The $63 billion firm has made much of its profligacy when it comes to programming. Netflix will still blow through at least $6 billion this year on creating TV series and movies - up about $1 billion from last year - even though it made a rare admission that some of its projects like “Crouching Tiger, Hidden Dragon: Sword of Destiny” were duds.

The competition has proliferated too and will only intensify. A variety of streaming services have become available from the likes of deep-pocketed rivals like AT&T, Dish, Google’s YouTube and others. Meanwhile, Amazon is paying some $50 million for the rights to stream National Football League games.

Still, Netflix has a good head start. The 20-year-old company emerged as the most widely used online video service in the United States, according to 42 percent of people surveyed in a Morgan Stanley report. What’s more, a third of respondents said Netflix has the best original programming among its peers.

The more subscribers it has, however, the harder it will be for Netflix to keep up the pace of growth. That explains why Netflix warned in a letter to investors on Monday that its progress should be measured by revenue and operating margins, not by growth in subscriber numbers.

Netflix hit an all-time high at the end of March, topping $148 per share, though its cash burn is an eye-popping $2 billion this year. Even if all goes perfectly to plan over the next three years, investors are paying 30 times those distant earnings. Hastings hasn't disappointed up to now. But he knows all too well how easily the plots of good stories can twist unexpectedly.

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