Starting out as a DVD rental business in the late 90s, Netflix has come a long way to establish itself as the world’s leading streaming entertainment service.
The Founding of Netflix
There’s been a bit of controversy over specifically how Netflix began. Reed Hastings has provided a few different versions, while co founder Marc Randolph has had his own version of the tale. Randolph tends to spread the credit around a little further than Hastings, who credits the creation from having to pay a late fee for a rental movie. Randolph has said the two had been trying to create their own “Amazon.com” for something, according to CNBC. That something became DVDs.
According to Netflix’s own website, Netflix was founded in 1997 by Hastings and Randolph as a way to offer movie rentals over the internet. This eventually led to Netflix.com in 1998, which focused on DVD rentals and sales. The next year the company added a subscription service, allowing the customer unlimited DVD rentals at a monthly rate. Things began to mold in 2000 when Netflix offered recommendations systems, which used members ratings to predict choices
Going public in 2002, Netflix grew slowly; hitting 4.2 million members by 2005. Worth less than $2 a share in the beginning, the stock didn’t begin to truly take off until around 2009, when it had made its way to around $8 a share. Of course, the rest is stock market history, as the shares have climbed astronomically; pushing towards $400 at one point.
The big tipping point was most definitely the introduction of streaming in 2007. Creating a place where members could watch content instantly online basically changed the game. The reverberations from this move are still being felt today, as more programming is geared around the ability to watch it as you want to, rather than catching it at a specific time when it airs.
In 2013, everything changed. Netflix introduced its own original programming. Think “House of Cards” and “Orange is the New Black.
By 2016, Netflix was accessible worldwide, and the company has continued to create more original content, while pressing to grow its membership.
If the introduction of streaming was the tipping point, the genius of it all was how Netflix essentially used other content creators to beat them at their own game. By licensing their content to Netflix, networks essentially gave the company the tools it needed to steal their viewership. While it might have seemed like a good idea in the short term, one could argue that it was an act of absolute self-sabotage by the networks over the long run.
The stock has been an incredibly successful investment, if you bought in early. Peaking in 2018 near $400 a share, Netflix stock has struggled to find its momentum again. The main reason here is valuation. Netflix has been priced at a very high premium for a very long time. Investors have placed a lot of speculation into the pricing, driving shares to levels that require a great deal of earnings growth to maintain. That growth is predicated on the continued rise in subscription fees. Much of the struggles facing the stock in the last year have to do with investors slowly seeing threats to that growth story.
Currently trading just shy of $500 a share, Netflix carries a premium of well over 100 earnings. The stock is up roughly 30% year to date, but is struggling to find real bullish strength. Looking forward, a lot may be dependent on how rivals affect membership rates. Netflix still needs that scale if it’s going to free up its cash flow situation
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