Paul Holland, a former colleague of Netflix CEO Reed Hastings, believes the biggest mistake investors make when evaluating the streaming giant is that they “continually underestimate the market size.”
“Many people have made the wrong bets” on Netflix throughout the years, Holland told CNBC’s “Squawk Alley” on Wednesday. “You just don’t understand how large the market is.”
Holland’s firm, Foundation Capital, led Netflix’s Series C funding round in 1999. Holland joined Foundation Capital in 2001. He worked with Hastings on another technology venture, Pure Software, from 1992 to 1997.
Shares of Netflix opened up about 9.5 percent on Wednesday, before trimming some of those gains. They were showing as much as a 15 percent rise in after-hours trading Tuesday following the company’s better-than-expected third-quarter earnings.
Netflix also said Tuesday it added roughly 7 million total subscribers, both in the U.S. and internationally, for the three months ended Sept. 30. That’s nearly 1.8 million more than Wall Street had expected.
Netflix stock has nearly doubled in 2018, leading some analysts to fear those lofty levels in an environment of increasing competition in the streaming industry. The price-to-earnings ratio on Netflix is nearly 130 times, according to FactSet.
“I’m very, very wary of the price,” media stock specialist Larry Haverty said on CNBC alongside Holland. Content creation is like the “new gold rush,” the LJH Investment Advisors managing director added, with everyone wanting a piece of the pie.
Disney‘s upcoming streaming service, set to launch in 2019, is already seen as a risk for Netflix.
“Disney basically owns the children’s market,” Haverty said. The media giant also owns the Marvel and Star Wars franchises.
However, Foundation Capital’s Holland is not deterred by potential competitors: “There’s such opportunity,” in streaming.”
Holland also “doesn’t worry” about Netflix’s large amount of spending on content. “They’ve traded effectively cash” for content, which has allowed it to “gain such a large share of the market.”
Mark Mahaney, lead internet analyst at RBC Capital Markets, told CNBC in a separate interview that he believes Netflix has a trifecta of competitive advantages; “accelerating sub adds, pricing power, and expanding margins.”
“The distance between them and competing offers keeps rising,” he said.
