Netflix (NASDAQ: NFLX), the streaming giant, is gaining ground today following reports that it wants to triple its operating income and double its revenue by the end this decade.
According to a WSJ report the mass media giant also wants to reach a market capital of $1 trillion by the year 2030.
The management’s dedication is admirable but the road to achieving these lofty targets is paved in uncertainty.
NFLX may not be able to deliver on its promises in the next five or six years due to a number of challenges.
NFLX must deal with saturation and competition
Netflix is often hailed as the winner in the streaming wars.
It continues to face intense competition from Disney+, HBO Max and Amazon Prime Video.
NFLX may find it increasingly difficult to grow its subscriber and market share as its rivals continue expanding their content libraries.
Netflix has already been a huge success in mature markets such as the US and Europe.
The Nasdaq-listed company will have to rely on international markets for further growth. These markets come with their own challenges, including lower average revenue per customer (ARPU).
As NFLX expands into international markets such as India and Brazil, it may face regulatory hurdles, geopolitical tensions, and censorship issues.
Netflix’s business model is expensive
Netflix has focused heavily on producing original content in order to maintain its leadership in the streaming space.
It’s an impressive strategy, but it’s also expensive.
Netflix’s ability hold its leadership position in the streaming sector will depend even more on its ability to deliver original, distinctive content.
Netflix’s goal of tripling its operating revenue by the end this decade may have to be put on hold, as more money will likely go to content production.
Investors should note that while NFLX has been successful in its advertising campaign, it is still a business which is highly sensitive to economic downturns.
Netflix stock is already traded at a premium
Netflix’s desire to join the trillion dollar club could be hampered by concerns about its valuation.
The price-to earnings multiple for the streaming giant’s shares is currently a little below 50. Comparatively, the average P/E for the entire industry is only 25.
To become a $1 trillion company, NFLX will need to grow at an annualised compound rate of 21% from now until 2030. This is compared to a CAGR of only 4.0% in the media and entertainment sector as a whole.
Analysts at Loop Capital believe that Netflix’s stock is already a good deal cheaper than its current price of $970. Their 12-month price goal for NFLX is currently only $1,000.
This post Netflix may not reach $1 trillion in market cap: Here’s Why appeared first on The ICD
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