It might feel like a replay for many, but once again the Netflix stock collapsed right at the beginning of the earnings season. The subs number was alarming to investors: H1 net adds came in at -1.5M vs. 5M expected, the first time the net adds went negative since 2011. The management cited 4 headwinds to growth:
High market penetration;
The spillover effect from Russia;
Competition from Disney/Hulu, Youtube, Amazon, etc.
Password sharing: there are more than 100 million households sharing passwords. It is a pretty sizable amount compared to the 200 million households that are paying customers.
Simply put, NFLX's Revenue = Subscriber * Pricing, NTLX is hurting on both ends with high market penetration and fierce competition. The CFO doesn't expect growth to reaccelerate before the year-end. Facing multiple headwinds, NFLX is planning to create a lower-priced service with advertising to help boost commercialization, targeting those who share accounts. It is quite an interesting twist as Hastings has been vocal about his favor of the subscription model.
"Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription. But as much as I'm a fan of that, I'm a bigger fan of consumer choice, and allowing consumers who would like to have a lower price, and are advertising-tolerant, to get what they want, makes a lot of sense."
If last quarter's stock collapse appears as an opportunity for value investors, this quarter certainly feels like a wake-up call about the viability of streaming as a business model. The company reported its earnings on Tuesday later afternoon, and Bill Ackman liquidated all his $1.1B shares on Wednesday, taking a loss of more than $400m.
"While Netflix's business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company's prospects with a sufficient degree of certainty."
Takeaways? 1) Reopening themes. On the one hand, NFLX triggered another round of panic selling in COVID beneficiaries (RBLX, SHOP, PTON, just to name a few); On the other hand, it points to the potential strength of reopening stocks such as airlines and travels. 2) The battle for attention and screentime is more fierce than ever. There have been many nascent players over the past 3 years, like Disney+, HBO Max, and Discovery. COVID might paint a short-lived, rosy picture of growth; we are now back to the reality where we only have 24 hours to spend. And we are not only talking about Disney, Warner, and traditional broadcasters here - Internet companies like Apple and Google compete against each other through their widely achievable customer base and “freemium” services. The fact that NFLX plans to roll out lower-tiered pricing will continue to pressure industry pricing. We see their move hurts competitors but benefits connected TV players like ROKU and TTD. 3) “Growth” to “Value”. When growth is no longer a lever, the valuation method will shift toward profitability: investors will scrutinize for margins and ask for predictability in cash flow. As a company going through a business model transition, it would be too optimistic to expect stability in the short term.
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