As far as mega-cap technology companies go, Amazon (AMZN) remains one of the steadiest long-term growth plays in the market today.
Indeed, Amazon’s near-, medium- and long-term returns for investors are hard to beat, particularly given Amazon’s size. The fact that a company with a $1.6 trillion market cap is able to produce this kind of capital appreciation for investors consistently is hard to fathom. (See Amazon stock analysis on TipRanks)
For companies like Amazon, maintaining the company’s rather high valuation multiple is key to long-term capital appreciation for investors. Growth remains robust for Amazon, though it has been slowing in recent years. The company’s 5-year, 3-year, and forward CAGR for revenue growth has declined from 29.88% to 29.45% to 27.2% on a forward-looking basis.
Indeed, this growth deceleration is slight, and reflects Amazon’s behemoth size. Still, revenue growth is declining. Thus, valuation multiples matter more for Amazon than for other stocks in the market today.
Accordingly, key inputs such as the risk-free rate and weighted average cost of capital matter more today for Amazon investors than in the past. In this regard, the near-term outlook has once again shifted to be optimistic. Inflation concerns appear to be simmering down. The Federal Reserve has urged investors to consider the idea that the inflation we’ve seen of late is simply transitory. Accordingly, bond yields have reverted to lower levels, juicing the valuations of growth stocks in recent months.
With this backdrop, let’s take a look at one key recent catalyst everyone’s talking about.
Amazon Deal to Acquire MGM Studios a Big Deal for Investors
On May 26, Amazon announced it signed an agreement to purchase MGM studios for $8.45 billion.
This deal certainly juices the company’s growth prospects in its media & entertainment division. The ability of the company’s Amazon Prime Video segment to gobble up market share in the streaming war it’s waging with the likes of Netflix (NFLX) and Disney (DIS) centers on the premise that Amazon can entice viewers with new and exciting content.
This deal provides Amazon with a vast library of more than 4,000 film titles. Among the key franchises acquired as a result of the deal include James Bond, Rocky, and Handmaid’s Tale, among others.
From a content perspective, this deal provides an immediate jolt to Amazon’s goals of becoming the industry-leading streaming platform. It’s going to be an expensive race to win, but Amazon has proven it’s got the deep pockets and willingness to spend to become the favorite in this space.
The size of this deal is also remarkable. This is the second-largest deal in Amazon’s history, following its $13.7 billion 2017 acquisition of Whole Foods.
For investors bullish on Amazon’s commitment to growing its streaming revenues, this deal is meaningful. The extent to which the ROI on this deal will pan out favorably to investors over the long term depends on one’s time horizon. Indeed, this deal looks more like a strategic move rather than one with great short-term return potential.
That said, over the long term, Amazon plans to reimagine and redevelop the "treasure trove of IP in the deep catalog" the company acquired to provide continued value over the long-term for investors.
Other key deals Amazon has made of late in its bid to strengthen its streaming moat include a $1.2 billion per year deal with the NFL for streaming rights for 15 NFL games each season, for the next 11 seasons.
What Analysts Are Saying About AMZN Stock
According to TipRanks’ analyst rating consensus, AMZN stock comes in as a Strong Buy. Out of 31 analyst ratings, there are 31 Buy recommendations.
As for price targets, the average analyst Amazon price target is $4,295.17. Analyst price targets range from a low of $3,720.00 per share to a high of $5,500.00 per share.
Bottom Line
This massive deal for MGM signals to investors that Amazon is in the streaming business for the long haul. Indeed, building a durable competitive advantage in this space is going to prove difficult and costly.
Nevertheless, long-term investors who have bet on Amazon’s success in growing its other core businesses, such as Amazon Web Services, into the giants they now are, know that growth won’t always be linear. Nevertheless, it could still be very lucrative over the long-term.
Amazon may well have overpaid for this deal. However, considering the cost of creating a comparable suite of original content from scratch, perhaps Amazon got a steal with the MGM deal.
Time will ultimately tell how this deal turns out. For now, investors should take solace in Amazon’s firm commitment to its streaming endeavors. This is a growth company that hasn’t disappointed investors for decades, so there is reason to believe it won’t start to do so now.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
It may not be the beginning of the end for Netflix (NFLX) stock. Still, as the content subscription service’s big media and big tech rivals bulk up, the streaming leader now faces additional challenges.
As is well-known, recent headline-making deals in streaming have included the proposed merger of AT&T’s (T) WarnerMedia unit into Discovery Inc. (DISCA), as well as Amazon’s (AMZN) recently-announced purchase of film studio MGM.
This development adds to the ground big media has gained when it comes to its own streaming services. ViacomCBS’s (VIAC) Paramount+, as well of WarnerMedia’s HBOMax are some recent examples. Put them together, and they may start to have a dramatic effect on Netflix’s growth potential, both in the U.S. and in its overseas markets. (See Netflix stock analysis on TipRanks)
So, what could this do to stock price performance going forward? Even with these headwinds, international growth may still be on the table. This could help shares, trading for around $492 per share today, to hold steady. Yet, if this “grow into its valuation” catalyst fails to fully play out, the above-mentioned pressures could weigh down further on shares.
NFLX Stock and The Impact of Big Media Consolidation
How will the recent media deals affect Netflix shares going forward? Sure, as some have pointed out, the Amazon-MGM tie up may do little to affect the streaming space. Even after the still-pending WarnerMedia-Discovery merger closes, this platform will remain at the top of the streaming heap.
For now, Netflix’s ubiquitous service remains the leader by subscriptions worldwide (204 million). With Amazon’s Prime Video (150 million) the second largest, big media’s various streaming platforms are still far behind, with Disney’s (DIS) Disney+ the only one coming close to hitting 100 million.
Nonetheless, even as it remains the streaming leader, this doesn’t guarantee it will not impact its underlying growth, as well as the future growth of the NFLX stock price, going forward. As the company’s pandemic tailwinds (which helped materially boost results in 2020) fade, the platform’s growth both in the U.S. and overseas is slowing down.
Based on sell-side projections of 2022, growth may still be at a level that allows Netflix to hold onto its current valuation. However, if the recent deal-making and rival streaming services launches result in its actual results falling short, this richly-priced stock could be at risk of pulling back.
Slowing Growth May Mean Valuation Contraction
Right now, even with the potential risks mentioned above, high growth remains on the menu for NFLX stock going into 2022. Sell-side estimates call for the company’s revenue to grow around 15%, and its earnings to grow around 23.2%, next year.
If it lives up to these estimates, it may be sufficient to help the stock, today trading for a forward price-to-earnings (P/E) ratio of 37.9x, hold steady at its present price levels. Yet, both estimates are far from being set in stone.
Why? Namely, with the pandemic wrapping up, Netflix’s subscriber growth is again falling short of expectations. Fortunately, even with the rising competition, the company’s annual content budget has yet to soar to a point where it threatens earnings growth, if revenue growth comes in less than expected.
With its content costs this year ($17 billion) the same as last year, earnings growth will still be outsized, even if the top grows at a much slower slip. Even so, if earnings fall short of 20%+ growth, it may be enough to contract Netflix’s valuation. Perhaps that will be only a modest correction, but a move down to a forward P/E of 30x would still result in a double-digit decline from today’s prices.
What Analysts are Saying About NFLX Stock
According to TipRanks, NFLX stock has a consensus rating of Moderate Buy. Out of 36 analyst ratings, 26 rate it a Buy, 6 analysts rate it a Hold, and 4 analysts rate it a Sell.
As for price targets, the NFLX average analyst price target today is $599.33 per share, implying around 21.7% in upside from today’s prices. Analyst price targets range from a low of $340 per share, to a high of $720 per share.
Bottom Line: Increased Competition Leaves Netflix Shares at Risk of Going Nowhere, or Lower, From Here
Netflix may remain the leader of the streaming space, but its days of delivering above-average growth may be numbered. As its worldwide subscriber growth slows, top and bottom-line results going forward could fall short of the expectations currently priced into shares.
That’s not to say that NFLX stock is at risk of big declines. Yet, as more investors fear that upside is limited, shares may have a tough time getting back to their highs set earlier this year ($593.29 per share).
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.