Shares of top video streaming company Netflix Inc. (NFLX, Financial) had an enjoyable Thursday as the stock gained around 10% before finishing the day up 9.22%. The company touted its ad-tier growth, which seems to signal things are working out following its messy and uncertain transition period. Undoubtedly, the departure of founder Reed Hastings seemed like a sign of ominous things to come. Further, billionaire investor Bill Ackman (Trades, Portfolio)'s quick exit from his short-lived stake was not an encouraging sign.
With more clarity on how the ad business is doing, shareholders of Netflix now have a reason to breathe a massive sigh of relief. There was a great deal of uncertainty as to how the ad-based tier would hold up. The passsword-sharing crackdown also angered many consumers, some of whom have been with the streaming giant from its early days.
In any case, both initiatives seem to be paying off, perhaps a tad sooner than expected. Personally, I thought it would take a while for disgruntled Netflix customers to reconsider the streamer, especially with all the alternatives out there these days. I was wrong. Once again, Netflix has shown us who the boss is in the streaming space.
Now that investors are enthused over the glimpse of how the ad tier is doing, I do not think it is time for Netflix to be letting its guard down. The company still faces stiff competition as it moves into the second half of the year. Further, the stock seems a tad stretched, with shares currently trading just shy of 40 times trailing price-earnings. That is a hefty price tag, and one that could entail more on the part of Netflix.
With a higher bar now in place, the company needs to continue investing heavily in initiatives to keep growth and profitability in a good spot. Understandably, there is only so much a streamer can do on the front of video streaming. One can only spend so much time in their day viewing streamed content. With the rise of social media platforms (which have become quite a time sink) and other attention-grabbing technologies, Netflix must understand that it is more than just fellow video streamers it needs to go up against.
TikTok gets banned in Montana: That could be a hidden plus for Netflix and other streamers
Fortunately, the reduced-cost version of its streaming platform could draw in crowds that would have otherwise spent their time on a social media platform like TikTok. With the popular app recently getting banned in the state of Montana (could other states be next?), users will need to find another place to spend their time.
Some will go to other social media platforms. Meta Platforms (META, Financial) has its robust Reels product, which is most comparable to TikTok. That said, I think there is a good chance that many folks in Montana who will be unable to access TikTok may consider spending their time on more passive viewing experiences. With such a low price of admission, Netflix stands out as one potential beneficiary of a TikTok ban.
Netflix has its "fast laughs" feed, which I think is a pretty stellar social media-like feature that it may wish to build upon to keep its platform more engaging.
The streaming wars arre not over yet
Warner Bros. Discovery (WBD, Financial), Walt Disney (DIS, Financial) and even Paramount (PARA, Financial) are credible threats to Netflix's dominance over the next three to five years. As streaming rivals struggle to catch up, the company may be able to add to its current rally. But now is certainly not a good time to be taking the foot off the gas pedal, not while companies like Warner Bros. Discovery and Disney explore the potential for consolidating their streaming platforms into one.
With an ad tier thrown into the mix, Warner Bros. and Disney may very well be able to benefit in the same way that Netflix did, with enormous subscriber growth from ad-tolerant users looking to save a few bucks.
Warren Buffett (Trades, Portfolio) may not be a huge fan of the streaming business despite Berkshire Hathaway's (BRK.A)(BRK.B) small stake in Paramount. However, streaming remains competitivel. Currently, Netflix is the streamer to beat. It could remain this way for some time. That said, the competition is taking notes, and you can bet they are learning from the moves that Netflix is making.
With that in mind, I think 40 times trailing earnings is a tad too much to pay for the stock. I would feel far more comfortable if shares pulled back a bit.
Final thoughts on Netflix
Early signs suggest Netflix's move into advertising is a success. Though the company appears to be enjoying another leg of growth, I would be mindful of the competition. They are undergoing big changes of their own, and they could potentially pay off in their own way.
