Netflix

[CY09]

The user growth story seems to have paused for Netflix.

While Asia Pacific is still growing, it is offset by subscriber loss in North America, Europe. This is due to the Russia conflict and price hike. Netflix does not extend its forecast, but it expects to lose another 2 million subscribers. Given inflation is shrinking consumers wallets, it is thinkable that some will cut their Netflix expenses. All in all, I expect Netflix to end 2022 with a subscriber base similar in number to end 2021.

It does mean Netflix may be reaching saturation point. They can raise fees but income elasticity will kick in and they will lose subscribers. Assuming $3.5 EPS per quarter, it does seem that Netflix at $226 is only at fair value as most of its growth is now gone. A fair price to invest but it is not a great company given that it has rivals in equal quality in content such as Disney (whose Marvel and Star Wars content has more draw)

[Wildreamz]

..

All in all, I expect Netflix to end 2022 with a subscriber base similar in number to end 2021.

It does mean Netflix may be reaching saturation point. They can raise fees but income elasticity will kick in and they will lose subscribers. 

..

Interesting prediction. 

I actually think they still can grow. In fact, without the impact from the Russian wars (Netflix essentially withdrew from Russia, a lost of 700,000 subscribers); there will be positive paid net adds of 500,000.

But, especially in Asia-Pacific, their strategy has to be different. As I don't think at their current pricing, they are competitive with their competition, who most offers a cheaper-ad supported tier.

It's also notable that Netflix has recognized that and is pivoting to an ad-supported model themselves.

Here is also another interesting data point from the earnings call:

Hey. Can I say one thing before they close us out, just as a tactical thing, one tactical thing that I should have mentioned earlier, Doug? I just want to make sure there's not a read-through when we guide to negative 2 million paid net adds in Q2. We didn't talk about full year and how -- what we expect. And we're not providing full year guidance, Doug, but I just want to make sure there's not a read-through from negative 2 million paid net adds in Q2 that there's going to be a steady strip down of negative adds.

We're not expecting our growth to reaccelerate, our revenue growth to reaccelerate before the end of the year, but we will grow revenue. And there will be paid net add growth. As we get to the back half of the year, Ted talked about the stronger slate.

We get further away from some of the big price increases. We get into a stronger seasonal period. So, I just want to make sure that that's understood as you think about the full year, even though we're not providing full year guidance. Sorry, just we didn't get to it.

Reed Hastings -- Co-Chief Executive Officer

(not vested)

[BlueKelah]

..

All in all, I expect Netflix to end 2022 with a subscriber base similar in number to end 2021.

It does mean Netflix may be reaching saturation point. They can raise fees but income elasticity will kick in and they will lose subscribers. 

..

Interesting prediction. 

I actually think they still can grow. In fact, without the impact from the Russian wars (Netflix essentially withdrew from Russia, a lost of 700,000 subscribers); there will be positive paid net adds of 500,000.

But, especially in Asia-Pacific, their strategy has to be different. As I don't think at their current pricing, they are competitive with their competition, who most offers a cheaper-ad supported tier.

It's also notable that Netflix has recognized that and is pivoting to an ad-supported model themselves.

Here is also another interesting data point from the earnings call:

Hey. Can I say one thing before they close us out, just as a tactical thing, one tactical thing that I should have mentioned earlier, Doug? I just want to make sure there's not a read-through when we guide to negative 2 million paid net adds in Q2. We didn't talk about full year and how -- what we expect. And we're not providing full year guidance, Doug, but I just want to make sure there's not a read-through from negative 2 million paid net adds in Q2 that there's going to be a steady strip down of negative adds.

We're not expecting our growth to reaccelerate, our revenue growth to reaccelerate before the end of the year, but we will grow revenue. And there will be paid net add growth. As we get to the back half of the year, Ted talked about the stronger slate.

We get further away from some of the big price increases. We get into a stronger seasonal period. So, I just want to make sure that that's understood as you think about the full year, even though we're not providing full year guidance. Sorry, just we didn't get to it.

Reed Hastings -- Co-Chief Executive Officer

(not vested)

market is using any excuse now to sell down tech shares, just like they bid them up during boom times. Now the fed is signalling tightening and even reducing there balance sheet, you will see suddenly all the free money pushing stocks up just poof disappear. Its just a repeat of the dotcom boom time.

End of the day netflix is still one of the top dogs in streaming space, high growth will definitely stall post pandemic, just like older tech like Meta/FB so excess valuations will be wiped out for sure. 

Quick google the PE is 20.53 which is now much more reasonable than the previous high valuations. Perhaps could be a BUY when all the big tech funds have given up on it. Bill Ackman just took a big 400m loss selling (maybe he is also shorting at the same time who knows..) Cathie Woods seems to have insider info and already trimmed it off few months back.

[specuvestor]

interesting discussion. I dont follow so good to know it was 700k from Russia. Then why are they guiding down 2m subscribers this year

[Wildreamz]

interesting discussion. I dont follow so good to know it was 700k from Russia. Then why are they guiding down 2m subscribers this year

Hi Specuvestor, they are guiding down 2m subscribers next quarter due to seasonality (and of course impact of loss subscribers and growth from Russia), but still expect the full year to be up.

[CY09]

Hi Wildreamz,

I dont think Netflix provided full year subscriber guidance. They are basing it on quarter by quarter guidance. They have only projected to end June 2022 where they see a 2 million subscriber loss

https://s22.q4cdn.com/959853165/files/do...,-2022.pdf

Revenue will grow year on year though because the loss in subscribers is offset by their increase in fees

[Wildreamz]

Hi Wildreamz,

I dont think Netflix provided full year subscriber guidance. They are basing it on quarter by quarter guidance. They have only projected to end June 2022 where they see a 2 million subscriber loss

https://s22.q4cdn.com/959853165/files/do...,-2022.pdf

Revenue will grow year on year though because the loss in subscribers is offset by their increase in fees

Yes they do not provide full year guidance. Please refer to my previous posts to see my quote from Reed Hastings from the earnings call transcript.

It's sort of a "non-guidance, guidance".

[weijian]

Actually, Bill Ackman's readiness to take a ~30-40% loss on his shortlived Netflix investment is a big worry. Bill Ackman is one who spent billions learning to cut loss with his earlier ill-fated investments.

Netflix’s Big Wake-Up Call: The Power Clash Behind the Crash

While Netflix’s competitors still have room to grow — and Disney in particular has committed to growing a lot — agents and creators believe they are seeing the end of the spending spree that has lined many pockets in recent years. Asked if the content bubble has burst, Grace and Frankie creator Marta Kauffman — a unicorn who got to a Guinness book-worthy 94 episodes of a scripted show on Netflix — says, “Yes.” (I interviewed her for an upcoming episode of my KCRW show The Business.)

A top executive at a legacy company that’s poured resources into streaming suggests that may be so. “We’d all be insane not to give the spend a hard look,” he says, adding, “Agents are flipped out more than anybody. They’re taking it hard.”

https://www.hollywoodreporter.com/busine...235136004/

[CY09]

To me, what I am worried about for Netflix is that its subscribers have less discretionary income and thus cuts Netflix off their expenditure.

The era of easy QE money resulted in Tech firms overpaying gig workers, software engineers and for streaming extent (these show producers and small time actors). Somehow these demographics tend to be the younger gen who consumes Netflix, Disney, Spotify for their entertainment. QT is going to hit them hard as their income will fall. Once that happens, they have to close their wallets. These subscription plans will be the first to go. Between Netflix and Disney, it is likely the former will go as it has no franchise to support it. If one notices, the marvel franchise forces ppl to watch continuation otherwise, they may not comprehend the next movie. For example, the next Dr Strange series has ties to Spiderman and Wanda series on Disney.

Europe has its worse off because electricity is going to be more expensive. it wont be felt now till Nov because less gas is consumed. But when winter returns, Europeans gas bills to stay warm will at least double. These are major markets for the Western Streaming companies and now they are forced to hike their subscription rates (to maintain profit growth) and are not essentials.

On Netflix's valuation end, I think we are going to see a few year's of profit plateau. While they will grow Asia's subscription, they can't raise prices due to competition. Too many cheap packages here and Asian Streamers seems to have cash to burn. I am amazed that Viu has survived well in South East Asia despite Netflix, Viu and Netflix do fight on the K drama front with each having their own exclusive tie ups

[weijian]

When there is sanity in spending, Netflix has a very scalable business (zero marginal costs) with immense FCF generation capability. However, the unfortunate thing that happened a few years ago was all their rivals started to treat themselves as rivals to Netflix and most of them are currently loss leaders to compliment their other businesses (Disney+ to the entire Disney ecosystem. AmazonTV to Prime membership)

Netflix returns to growth, saying the worst of slowdown is over

The streaming leader added 2.41 million customers in the third quarter, exceeding internal forecasts as well as expectations on Wall Street. Netflix grew in all regions of the world and said on Tuesday (Oct 18) it expects to sign up another 4.5 million globally this period.

Management plans to increase sales by introducing an advertising-supported version of the streaming service in November and charging for password sharing next year. Customers willing to watch Netflix with five minutes of advertising per hour can pay US$7 a month, less than half of the cost of the most popular plan.

https://www.businesstimes.com.sg/consume...wn-is-over