With last year’s conclusion of the Hollywood writers’ strike, Netflix (NASDAQ:NFLX) and other entertainment content producers breathed a sigh of relief. At the same time, Netflix may enjoy the lion’s share of the benefits. On the other end of the spectrum, cineplex operators may be forced to undergo much soul-searching. I am bullish on NFLX stock, in large part because the box office might not have an answer to the streaming business model.
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NFLX Stock Should Dominate the New Entertainment Paradigm
Essentially pioneering the on-demand content-streaming business model, Netflix needs no justification for its robust per-share price tag. Since the start of the year, NFLX stock has gained almost 33%. Recent price action suggests that the rally may have more room to run. That wouldn’t be surprising because Netflix dominates the new entertainment paradigm.
Fundamentally, Netflix users enjoy the convenience of watching whatever they want, whenever they want. Further, with a subscription, they can take their content consumption anywhere they please (well, so long as an internet connection is available). Consumers simply don’t have that convenience with the traditional box office business model.
Not only that, but consumer research data shows that people prefer streaming platforms, thus bolstering NFLX stock. As of May 2022, approximately 55% of U.S. adult internet users stated they rarely (or never) watch films at the movie theater because they preferred watching content at home. That’s a harsh indictment against cineplex operators, particularly AMC Entertainment (NYSE:AMC).
Further, it’s possible that this preference may “worsen” for the box office. In large part, big Hollywood studios might want to blame television manufacturers. As CNN pointed out, while inflation has been devastating household budgets, TV prices have fallen. The news agency mentioned that some 55-inch TVs are retailing (at full price) for less than $250.
Subsequently, such pricing is a gargantuan headwind for AMC while being a godsend for NFLX stock. Based on one big-box retailer’s website, 70-inch TVs go for around $400 to $500. Essentially, consumers have so much immersion in their living rooms for cheap. As this technology improves, people with even modest incomes can bring the box-office experience to their homes.
Again, that’s a huge lift for NFLX stock because the underlying tech ecosystem accentuates the Netflix experience. At the same time, it mitigates the box-office experience.
The Numbers Tell All
Of course, it’s difficult to make an investment decision solely based on consumer research data. However, the hard numbers reflect the validity of surveys, pointing to severe challenges for the cineplex business model.
First, let’s look at Netflix’s revenue growth. At the end of 2019, Netflix posted revenue of $20.16 billion. By the end of 2023, sales soared to $33.72 billion. That gives us a compound annual growth rate (CAGR) of 13.72%.
According to Fortune Business Insights, the global video streaming market reached valuation of $554.33 billion last year. By 2032, the sector could reach a valuation of nearly $2.49 billion. That comes out to a CAGR of 17.8%. While Netflix is past its mass-growth phase, the sales expansion over the past four years is roughly in line with the market. Given the relative maturity of NFLX stock, that’s a huge positive.
Now, let’s look at AMC. At the end of 2019, the company posted $5.47 billion in revenue. By the end of 2023, this metric fell to $4.81 billion. That comes out to a CAGR of -3.16%. And it’s not just AMC that’s struggling. Cinemark (NYSE:CNK) also exhibits a negative CAGR from 2019.
Further, ResearchAndMarkets points out that the global movie theater sector may expand at a CAGR of 4.7% between 2023 and 2027. Simply put, it appears that the growth in the global cineplex business is not coming from the U.S. That’s especially problematic because if the resolution of the writers’ strike doesn’t yield positive results for the box office, the whole sector needs a rethink.
However, even if that rethink occurs, it’s not clear if it would dent the dominance of NFLX stock. Again, a majority of surveyed internet users prefer watching movies at home. The combination of superior (and cheaper) home TV technology and rising movie theater ticket prices means that Netflix will likely continue swimming while troubled cineplex operators may tread water.
Some Exceptions to the Rule
Overall, while NFLX stock is in an outstanding position, the cineplex business model isn’t completely dead. For one thing, the fact that Cinemark posted net income last year suggests that it can be a viable proposition as long as it maintains strict expenditure controls.
Second, an enterprise like Marcus (NYSE:MCS) could be interesting because the company is a cineplex operator that serves smaller markets. With young people moving toward more rural areas for cost-of-living reasons, it could attract shareholder demand.
Then again, the cineplex investment market has been generally disappointing. So, something has to change – and quick.
Is Netflix Stock a Buy, According to Analysts?
Turning to Wall Street, NFLX stock has a Moderate Buy consensus rating based on 23 Buys, 12 Holds, and one Sell rating. The average NFLX stock price target is $656.64, implying 0.9% upside potential.
The Takeaway: NFLX Stock Could Rise Because Movie Theaters Lack an Answer
Fundamentally, almost everyone knows the bullish narrative of Netflix. As the pioneer of the streaming business model, it has become a global phenomenon. Further, even with the business having matured, it’s still growing at a solid pace. That may be due to cineplex operators lacking an answer. Elements such as cheap TVs reward NFLX stock while penalizing the box office. And with customers preferring to stream at home, the entertainment paradigm has likely shifted permanently.
