Tech Corner: NFLX After Losing WBD Bidding War

All right. Welcome back to the tech corner. I'm George Tillis and your markets contributor

with the Schwab Network. Today we're going to be revisiting Netflix. As you all know, Netflix

is a leading global entertainment service provider offering a vast array of TV services,

documentaries, feature films, and games across various genres. As a video on demand distributor

of movies and television shows over the internet worldwide, subscribers have access to the

Netflix content library for fixed monthly subscription fee. The company offers several

support service tiers as well as advertising support services as well. The flexibility

allows Netflix to carry catered to various consumer needs. We're offering tiered subscription

models, including the rapidly expanding ad supported plan. Netflix has successfully

maintained a dominant reach now serving over 325 million paid memberships across more

than 190 countries. The footprint now is truly international with 59% of the revenues

coming from overseas. Now, let's get some of the competitors in Netflix. First off,

noble competitors include Disney with Hulu, Amazon Prime Video, Warner Brothers, which

includes HBO and Discovery, Paramount, which includes Paramount Plus on the streaming

service side, Comcast as well as Google with Alphabet's YouTube platform. Now, when it comes

to unique value, Netflix's proposition lies in its extensive global reach and its ability

to produce culturally relevant content tailored to specific markets. This proprietary

technology enhances user experience through personalized recommendations, which is a significant

differentiator. Additionally, Netflix's investment in artificial intelligence and data

analytics enables it to optimize content creation and advertising, creating a defensible

mode against competitors. Furthermore, the company's ad supported subscription plan expands

accessibility and provides a new revenue stream, reinforcing its position as a leader in

the streaming industry space. Now, let's take a look at some recent news on the name. First

off, going back to January 20th of this year, the company reported its fiscal year 2025 Q4

earnings and sales. Revenue's actually came in the head of estimates that are on $10.54

billion, up 12.5% year-to-year year, and more importantly, operating income increased to $2.96

billion of 30% year-to-year year, and operating margin was shown to increase to 24.5% of sales,

versus 22.2% for the same quarter in the previous year. Some key performance drivers include

its ad to momentum, where advertising revenue exceeded $1.5 billion. This is two-and-a-half times

what it was last year on a year-to-year basis. Also, management explained that they expect this

advertising revenue to increase to $3 billion in sales by 2026. Despite some of those recent

headlines in terms of earnings and sales, as well as margin improvement, there are other

pauses we have to consider with the name. First off, the company's AI-driven platform boost

engagement and production efficiency, outpacing traditional broadcasters and big tech rivals

with ad-supported tiers driving half of its new signups and available markets. The launch of

this ad paid subscription plan, which goes back to late 2022, has been extremely successful.

Advertising is certainly a new revenue source. Netflix is leading distribution to subscribers

across the globe, and is also attracting cross-licensing opportunities. Most recently, the decision

to not proceed with the Warner Brothers acquisition has resulted in $2.8 billion in termination fee gains,

which strengthens its balance sheet and allows further investment in content and share

buybacks. Strong double-digit revenue growth, combined with operating leverage that's improving,

is expected to drive massive free cash flows going further, enhancing its financial stability

and growth prospects. And lastly, despite the growth in double digits for sales,

net income margin is also improving. Profitability in that case is over 24% of sales,

significantly above the sector average around 4%. This excellent profitability metric underscores

the company's efficiencies in converting sales and actual profits. Now, despite many positives

for netflix, we also have to address always some concerns. Now, first off, netflix's decision

to walk away from the Warner Brothers acquisition may raise concerns about its ability to compete with

more leverage competitors that may gain strategic advantage over netflix over time. Despite strong

revenue growth, netflix's viewing hours only grew 2% in the second half of 2025. This may indicate

potential challenges in maintaining engagement, as well as potential pricing power going forward.

The company's high valuation and the risks associated with the previous Warner Brothers bidding war

exposes netflix to execution leverage risks, leaving little room for error. If we look at an

earnings multiple on a forward basis at around 30 times earnings, this is double the sector

medium of 14. Again, these multiples are high, which can intensify price action to the downside,

based off potential pitfalls and things like sports broadcasting and intensifying competition.

All right, now let's look at the technical picture for netflix. First off, the technical

picture is rather mixed. The company actually has a six month price decline of 25 percent

and a one year decline of 5 percent, which has been underperforming the S&P in those two periods

of times. However, recently, the stock has reclaimed both the 10 and 20 day moving averages,

which suggests the near term trend is positive and bullish and is now in a short term

consolidation zone. In late February, in late February, the stock surged up over 20 percent from

the February 27th lows, which was approximately $75 a share. It has risen significantly since

them, but it has also reclaimed the 50 day moving average. Now, this reclaimed validates the strong

near term technical condition for netflix. However, if you look at the intermediate term,

the stock is still below the downward sloping 200 day moving average, which indicates the stock

is slowly improving and still building upon a base of near term support at around $90 a share,

which is actually the low of the gap day going back to February 27th.

Now, if the low of the 27th actually fails, you have to keep in mind that price action may

continue to lower towards that rising 50 day moving average. Lastly, from a relative strength

standpoint, the stock has certainly outperformed the market of the last 30 trading days,

and the RSI indicator is above 50, which suggests improving price action conditions for netflix.

Now, in summary, netflix continues to stand out as the undisputed tighten of global entertainment.

While we think of them as purely a streaming service, they are now a massive multi-faceted

distributor of television series, documentaries, feature films, as well as mobile games.

The company is doubling down heavily on being the everything at for entertainment.

By walking away from the Warner acquisition, they've proven they won't sacrifice financial

health for vanity metrics. With a focus on live sports, immersive theme parks, and a booming ad

business, netflix is successfully evolving from a tech disruptor into a diversified media conglomerate.

All right, that's it for this week's edition of the tech corner. Please don't forget to like and

subscribe to the Schwab Network. I'm George Tillis. We'll see you here next week.