Netflix and friends are changing the face of the consumer market
Now even Leonardo DiCaprio is joining the party. The Hollywood megastar will soon be producing a wide range of documentaries about the environment and conservation for Netflix. Netflix is the world’s largest internet streaming and subscription service, with 57.4 million customers, and has been the main beneficiary of the boom in video-on-demand services. Stocks in the technology sector are also very promising. But the “strategy of relying on a broad upturn in the technology industry could ultimately come to nothing. Stock-picking, on the other hand, could continue to pay off”, says Moritz Rehmann, GAMAX Funds Junior portfolio manager.
New headlines about the American online-video-streaming service, Netflix, appear almost daily: 4.3 million new customers in the final quarter of 2014, net profit of US$83 million, and the after-hours trading jump in share price of up to 15 per cent to over US$400. On top of this, the streaming service provider has secured the global rights to make the movie Beats of No Nation, an ambitious, potentially Oscar-winning production about the fate of African child soldiers. Netflix CEO Reed Hastings anticipates renewed profits of US$37 million for the first quarter of 2015, despite a pipeline of further investments coming down the line.
The unique selling point in TV productions: Netflix is making great efforts
Netflix intends to invest US$9.5 billion in its own TV productions over the next five years. Such an exclusive selection will clearly differentiate its service from that of its competitors. “Such investments can only pay off with very successful international marketing. There is not much room for failure.” says GAMAX expert, Rehmann. By pursuing this strategy, the American service provider is after all taking on all the risk associated with running a film studio. One great advantage is that these productions are largely series related. As long as the series is running there will always be opportunities to intervene in or even cancel an unsuccessful production,” says Rehmann. Access to Netflix’s sucessfully produced series encourages customer loyalty – a positive for it’s subscription packages.
One in-house production worthy of mention is of course House of Cards. Better Call Saul, a spin-off of the mega-hit Breaking Bad, is the latest hit from the United States that is currently running on the video-on-demand platform. These highly successful formats work as a door-opener for many customers, especially in Germany. According to a recent survey, Netflix was able to establish itself very successfully in Germany after its launch last autumn. Its market share is approximately 8% – although this is still quite far behind its biggest rival, Amazon, which has a 33 per cent market share with its Prime service. However, in the medium term, Netflix has the potential to catch up with iTunes and Maxdome. These two services from Apple and ProSiebenSat.1 Media AG each cover around 11.3% of the market. Netflix has an advantage over the competition in that it also offers original programming in English.
Different trends: Google is on the up, Apple celebrates all-time-highs
With the success of Netflix, does this mean there will soon be a rally in the market overall for technology stocks? Growth stocks in the industry have been lagging behind the overall market and value segment for the past year. That said, recent developments have been highly contrasting: while Google, for example, consolidated for almost the whole of 2014 and has only recently seen a positive upward movement in its stock price. Whereas Apple’s share price has rallied strongly in recent months and reached new highs – it is now the largest company in the world by market capitalisaton. A rally is possible, but it only relates to the US market, says GAMAX expert, Rehmann. In the US, even companies in the so-called “old economy” (e.g. automobile, materials and chemical industries) were able to outperform against the benchmark, not least on account of attractive dividends. However, this may just increase the pressure on dividend shares in the run-up to an interest rate reversal, and we could see a return to growth stocks like Netflix. Recently, the impression that the Fed will be cautious in raising interest rates has been gaining traction. The opportunity for a broad recovery in the technology sector may therefore be missed. “Meanwhile, stock picking should continue to pay off”, says Rehmann.
Changes in user behaviour: a significant shift to video-on-demand
User behaviour is showing an increasing shift towards video-on-demand services across all age groups. The changes in viewing habits are already very clear: for example, 16-to-24-year-olds in England are already spending 13 per cent of their TV time on streaming and video-on-demand services. Even among those aged over 64 it still makes up 4 per cent of their time watching television. ProSiebenSat1. Media AG, for example, has positioned itself very well for the German market in particular with its service. The listed company’s ‘myvideo’ platform is particularly successful in meeting the demand for non-linear TV, because the content of its own productions is marketed via this format.
The consumer landscape is showing signs of a distinct change over the longer term – a development that can be leveraged on from an investment perspective. The revenue to be generated in these markets is still low for now, however, this is expected to change in the future, especially as completely different providers such as YouTube compete for consumer viewing time. The growth rates in this segment, high cash holdings and company investments are indicators of future growth in revenue and open up considerable potential for participating companies in the long term.
About GAMAX Management AG
GAMAX Management AG, a boutique fund management company based in Luxembourg, was founded in 1992, and acquired by the Mediolanum Banking Group, an Italian financial services group, in 2001. GAMAX currently runs three funds with a total value of 533.5 million euros (as of Feb 28 2015). The boutique offers two actively-managed equity funds with specific investments in strong brands and in the Asia-Pacific region through its funds ‘GAMAX Junior’ and ‘GAMAX Maxi Fonds Asien’. Fund manager, DJE Kapital AG, targets long-term outperformance of benchmark indices for both GAMAX funds.