In an ocean full of sharks, will Netflix (NFLX) thrive? via /r/wallstreetbets #stocks #wallstreetbets #investing


In an ocean full of sharks, will Netflix (NFLX) thrive?

A business-model:

Netflix’s vision relies on two conditions: expand the user base as quickly as possible to gain a strong position in the market; to fulfill the first condition you must create your own content. As we will see under, this strategy is still in place, however, we are at an inflection point. Netflix will either continue its meteoric growth or settle and progressively disappear. There will be no in-between.

Subscriber Growth Drives Netflix Story

Over the last several years, Netflix was focused on growing its subscriber base. In this sense, it has been investing heavily in local-language original content production worldwide. The addition of net subscribers dictates Netflix stock performance.

Netflix ended the second quarter with 209.18 million subscribers worldwide. The U.S. and Canada accounted for 35.4% of the total subscriber base. The rest is spread across the globe.

Stay-at-home orders during the Covid-19 pandemic drove business for Netflix and other home entertainment services. Consumers watched more television because movie theaters, live music, and sports were shut down during the pandemic. However, the reopening of the economy hurts Netflix. It faces difficulties in comparison to last year. Subscribers keep increasing but at a slower rate.

Netflix: product analysis

Now for a while, Netflix has been producing its own series. This choice limits the costs of purchasing series from other producers and ensures exclusive content for subscribers. Netflix has been rather successful with hits as: "Money Heist," "Orange Is the New Black," "Stranger Things," "The Umbrella Academy" and "The Witcher."

And this successful trend is increasing as recent shows on Netflix have been buzzworthy including: "Bridgerton," "Ginny & Georgia" and "Sweet Tooth." Popular new original movies include "Fatherhood," "Army of the Dead" and "Gunpowder Milkshake."

Creating its own content is a great initiative. A survey by investment bank Cowen showed that Netflix's growing library is the top driver of new customers. Managers’ perception of reality and the wishes of customers seem aligned.

Netflix Dominates 2021 Awards Season

These series are not only commercially successful but also cinematographically successful. This year, Netflix has been awarded numerous prizes.

On July 13, Netflix received 129 nominations for Emmy Awards from the Television Academy. It was close to second to WarnerMedia's HBO and HBO Max, which garnered 130 nominations. The most-honored Netflix shows included "The Crown," "The Queen's Gambit" and "Bridgerton."

Netflix won the most awards of any studio at the 93rd Academy Awards on April 25. It picked up seven Oscars, but it came up empty in the best picture and acting categories. Netflix headed into the ceremony with 36 nominations, far more than any other studio.

Netflix also garnered the most awards of any studio or network at the 26th annual Critics Choice Awards on March 7. It won 14 awards for productions such as "The Crown," "The Queen's Gambit" and "Ma Rainey's Black Bottom."

At this year's Producers Guild Awards on March 24, Netflix won awards for episodic TV drama ("The Crown"), limited series ("The Queen's Gambit"), and documentary film ("My Octopus Teacher").

Netflix took the top prize at the 27th Screen Actors Guild Awards on April 4 for its movie "The Trial of the Chicago 7." It also won awards for TV shows "The Queen's Gambit," "Ozark" and "The Crown." Netflix took home seven awards at this year's SAG Awards.

Fundamentals

Here are few fundamentals (because the amount of cash the company owns still matters).

Balance sheet

Current assets or well above current liabilities which means that the company can pay all its short-term debt with the cash on hand.

Moreover, one can see that equity is high and increased a lot in the past 6 months (by more than 25%). This is great news for shareholders as it means that Netflix has cash for future investments, or it will return it to investors.

Q2 2021 earnings: letter to shareholders

Statement of Profit and Loss

We can observe a slight increase in revenue compared to last quarter however it does not transfer in higher net income as marketing expenses increased and interest and other income sharply dropped. We can wonder if the increase in marketing expenses was useful as they increased it by 12% when led to an increase in revenue (if there is a causal link) of 2,5%. Then lower revenue from interest (loss) also led to a decrease in net income compared to the previous quarter.

On a broader scale, results are good compared to the same quarter one year ago. This is mostly due to a proportionally smaller increase in the cost of revenue compared to the increase in revenue itself. However, it must be noted that also compared to this period, the increase in marketing expense did not lead to a proportionally increase in revenue. In the long run, this might be annoying as it means that customers do not react to Netflix’s marketing. It reduces Netflix's possibility to increase revenue and then profit through marketing.

Q2 2021 earnings: letter to shareholders

Growing competition:

Meanwhile, Netflix is facing new competition from traditional media companies. AT&T (T)-through WarnerMedia launched HBO Max in May 2020. Comcast (CMCSA)-owned NBCUniversal followed in July 2020 with Peacock. Discovery (DISCA) debuted its Discovery+service on Jan. 4. ViacomCBS (VIAC) launched Paramount+ on March 4.

Other services include Amazon (AMZN) Prime Video, Apple's (AAPL) Apple TV+, Walt Disney's (DIS) Disney+, Hulu, and more.

Increasing competition is starting to take on Netflix’s market share. Relative to competitors Netflix’ shows are getting less popular:

https://preview.redd.it/09hfhkepwln71.png?width=605&format=png&auto=webp&s=cbc26fe88e6ccf6110824407dc5f7762faf01035

The situation could get even more complicated for Netflix. Indeed, knowing that customers have on average 5 streaming services ( Despite Return to ‘Normal,’ People are Spending More Time and Money on Streaming Services Now than During Height of Pandemic, TMT Insight Briefing Report, 2021), if we subtract one music subscription, we are left with 4 subscriptions. Customers will likely have a Disney and Prime subscription due to the variety of their catalog and the “must” they contain. Amazon’s recent move to buy MGM and with Disney still releasing blockbusters, it seems unlikely that customers will avoid these two services. Then, currently, it makes sense to add Netflix among the two streaming services left.

However, such a high number of subscriptions is unlikely to persist over time, people will likely tend back to their pre-pandemic habits. Moreover, in the above reasoning, I did not consider Apple. With its massive resources, it could increase its budget in order to attract more customers. Companies like AT&T and Comcast still have deep pockets and if they judge it useful to invest in streaming, they will have resources that Netflix does not have. Of course, currently, Netflix offers the best product as shown by this poll ( Assessing Video Trends in US, UK, Germany, and Japan; John Blackledge, James Kopelman, William Kerr and Max Spaeth; 2021). They have certain knowledge and unique know-how and brand. However, quality can be purchased by hiring good employees and the previously mentioned companies have the capabilities to hire such people.

Questionable management decisions:

On Oct. 29 of 2020, Netflix increased its price by 1 USD for the standard and premium tiers of its subscription video-on-demand service in the U.S. Even if Netflix stock jumped on the news. This decision is questionable. Indeed, Netflix is already one of the most expensive services compared to competitors. Prime is at $8,99 per month and Disney Plus is at $7,99. Other competitors are usually a bit cheaper than Netflix. It also means that now Netflix has fewer possibilities to increase profit. We have seen that competition is increasing, which means that it will be more complicated to draw new customers. At the same time, rising prices will get even more complicated.

Management should also reconsider its marketing as the analysis above in the “fundamentals” part shows that it is inefficient at increasing revenue. This is concerning.

TLDR: Netflix is still a top-of-the-art streaming service. Recent awards show that series from Netflix are the best. However, competition is ramping up with Amazon who bought MGM, and Disney still releasing blockbusters. Deep-pocket companies like Apple and AT&T could be future challengers. Moreover, Netflix seems to have already used its ability to increase earnings through a price increase as their service is the most expensive compared to pairs. Polls showed that the competition is getting market share even if the number of subscribers keeps increasing for Netflix. In conclusion, I do not expect Netflix to decrease but I do not see numerous future catalysts which could push the stock higher.

PS: As my text present it, I am not a shareholder of Netflix. I have been in the past, but this is over for the reasons mentionned above.

Submitted September 15, 2021 at 07:57AM by Beautiful-Ad-8447
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