- Netflix and Amazon have announced new content partnerships to differentiate their online TV streaming services.
- The deals highlight the shift of the online TV industry’s focus from software and technology to content based differentiation.
- Netflix and Amazon continue to be expensively priced given the earnings growth currently priced into the respective stocks.
Online TV streaming services are attempting to differentiate their services through content deals. This is a fact which has been evident for quite some time now. In our earlier post covering the Amazon HBO deal we had mentioned how the battle in the online TV streaming industry has moved from software and technology to content generation and differentiation.
The leading players in this space Amazon (AMZN) and Netflix (NFLX) have been going strong signing new deals and creating in-house content as each looks to attract more users to its service. The companies recently announced new deals which once again focus on the content differentiation strategy in the online TV streaming space.
New deals to boost digital media content
Netflix recently announced a deal with Chelsea Handler for a late night talk show to be aired sometime in 2016. The deal also includes a one hour special based on Handler’s ‘Uganda be kidding me’ tour apart from docu-comedy specials on a variety of subjects. Late-night talk shows have remained one gap between broadcasting TV and online streaming TV due to the technical limitations of the online TV streaming service. Has Netflix managed to reduce that gap? Well that would be a certain surprise if Netflix can air same day produced shows in 2016.
Amazon hasn’t been quite on its part, following up its HBO deal with another deal last week with Aardman animations. The latest deal gives Amazon Instant prime video service the exclusive subscription streaming rights for short film series, Wallace and Gromit, Shaun the sheep, Timmy time and classic animation Rex the runt. The deal is aimed at capturing a larger share of the younger viewers.
Online TV consumption up by 246% in Q1 2014
Amazon continues to trail Netflix in the online streaming market in terms of market share as well as number of videos available in the library. Amazon had a 3% market share in March 2014 against 57.5% share for Netflix.
|Market Share March 2013 (%)||Market Share March 2014 (%)||Change|
The online TV streaming industry is growing rapidly and while Amazon Prime is making rapid strides within the industry, Netflix continues to be miles ahead of the rest. According to a recent adobe report, online TV consumption saw a whopping rise of 246% in Q1 2014, highlighting the opportunity which lies ahead of online TV streaming service companies. As is evident from the above table, online TV streaming companies have been eating into the share of YouTube. This could see the online TV streaming services explode as the online TV consumption shifts more to these services.
While it is certain that services like Amazon instant prime and Netflix are primed for growth, Will these return exceptional returns to shareholders?
Netflix and Amazon current valuations imply extraordinary earnings growth
The current valuations of Netflix and Amazon make it an extremely risky proposition to invest in either of these companies. The last twelve months price-to-earnings multiples and price-to-sales multiples are given in the table below.
|LTM Price to Earnings ratio||LTM Price to Sales ratio||1 year Forward PE ratio*|
*1 year Forward PE ratio from zacks.com
The forward valuations imply an earnings growth of 55% YoY for Netflix compared to a 95% YoY growth in Amazon’s earnings over the next one year. The fact that Netflix earnings will be negatively impacted by its expansion plans in second half of 2014 and the extremely volatile Amazon bottom line, makes the two stocks extremely risky at the current valuations. Hence the earnings growth currently priced into Netflix and Amazon stocks is hard to justify making each of these high risk bets.
We continue to reiterate our negative long term outlook on Netflix with a current rating of 2.4/5. Our analysis of Amazon reflects our current concerns surrounding the stock.