Does Netflix Have Networking Effects

Does Netflix Have Networking Effects

The only reason #FAANG stocks continue to get loved the spectacular return they deliver to their shareholders. These companies continue to grow despite their size due to the #networkingeffects. The simple premise of the networking effects is that you will have higher growth as you become big. So it would help if you gobbled your competitors for a strong networking effect, explaining Meta‘s success in social networking and Google‘s in search. Amazon and Apple still rule online retail and smartphones, bringing me to Netflix.

I look at the last five years sales growth for Netflix, and the numbers are below:

Year  Revenues($B) Growth
2017          11.60 32.40%
2018          15.79 35.10%
2019          20.16 27.60%
2020          25.00 24.00%
2021          29.70 18.80%

As Netflix grows, its growth rate declines, contradicting our networking effect’s hypothesis despite the margin improvement.

Then i analysed whether this decline is specific to Netflix and looked at its competitors, Roku Inc., The Walt Disney Company, and Discovery Inc. The surprise is that the growth declines for other streaming services imply that the streaming business has become competitive. To gain market share (adding subscribers), one needs to lower prices, reduce churn, and spend more on content.

So, for instance, Netflix is ready to compromise on its ARPU for the Indian market at the cost of adding its subscriber base, and i believe other players would follow the same approach.

Thus, I believe that Netflix would not enjoy any networking effect or, at best, meagre indirect networking effects, and analysts need to review its valuation. Netflix’s P/E ratio has declined from 89x in Dec 2020 to 35x in December 2021.