S2E4 – Netflix Stock Review

Netflix Stock Review

Netflix Stock Review. In this episode, I break down the 4 Ms.

Time Codes

02:53 – EPS 05:00 – Meaning 10:00 – Moat 13:45 – Management 15:38 – Conclusion Youtube

Transcription

[00:00:05.830]

In this video, we’re going to talk about Netflix. So on April 20, the earnings report came out and the share price went down by about 35%. What we’re going to do is talk about the why the really four reasons why the share price has dropped. And then we’re going to do a forum analysis. We’re going to look at the numbers of the business, the MoS, then we get the meaning, the moat and the management.  

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I know some of you are shareholders, so there’s a lot of fear right now. Like, oh, my gosh, what should I do? The stock is falling. Well, I do have some good news with the business. We’re going to talk about that a little bit.  

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So this is not a good I wouldn’t say it’s time to freak out. Be patient. There are some cool changes happening with Netflix. So if you’re a long term subscriber, hang on, you’re going to be in a tough little trench right now. You could say, but things could look better in the future.  

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Now if you’re on the sidelines, maybe waiting to invest, same situation. I’m going to give you a little context of what I would do in this situation if we’re kind of sitting on the sideline. So let’s go ahead and dive in.  

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Okay. So there are four reasons why the share price declined. Number one, the competition. Obviously, we’ve got a lot of competitors in this space. You’ve got Disney Plus and Hulu and HBO, Showtime, Paramount, Amazon.  

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The list goes on and these new platforms keep coming out. Then people have to make a decision what platform they’re going to stay with. So that’s why you’re seeing a little bit of churn. We’re going to talk about the numbers in a little bit. We also have a situation with password sharing.  

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There are 100 million people that are actually 100 million people on the platform that are sharing this platform with other households when they shouldn’t. That’s like half of their actual customer base. They have about 214,000,000 people. So there’s a lot of abusers, as they say. And we’ll talk about that in a second as well.  

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The third reason is they do place a little bit of blame on inflation, which I get.  

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Things are becoming more expensive, so people are cutting their costs. And again, they have to pick and choose what platform they’re going to stay on. And then we have Russia. So Russia had 700,000 Netflix account on its own while those have been suspended. They’re not making they’re not generating any revenue on those accounts.  

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So let’s dive in. With every earnings report that you see every quarter, there are a few numbers that analysts are looking for. Number one, always being ups. There’s the expectation, and then there’s the real numbers that come in. Then you have the revenue in this case.  

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And then they also looked at the subscribers. So starting with APS, they were expected to hit two point $92. They came in at three point $53. They actually were higher. So they are becoming more profitable.  

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This is a good sign. Even though the subscribers did go down, the revenue was expected at two point 94 billion and it came in at seven point 87. That’s still pretty good. It’s just a slight miss, but that share price still went down like 35% in a day. This is very similar to what happened to PayPal.  

[00:03:26.220]

They missed their EPS a quarter ago. They missed it by $0.01. And their share price was like cut in half. What the market is doing right now is there are a few investors that stated this, too is they’re finding these stocks and the market is angry. So they’re taking their anger out on them.  

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Paypal being one. Now we’ve got another one, Netflix. It’s like we don’t like what’s going on in the market. Let’s go ahead and punish a stock for that. This has happened in the past, and we’re seeing that with Netflix.  

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Unfortunately, this happens. You just have to weather the storm. There’s another number here to pay close attention to. This is the one that’s a little alarming, but not too bad with the business. And that’s a subscriber.  

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So they’re expected to increase their subscribers by 2.5 million and that declined by $200,000. That’s a pretty big mess. But when you really break down the numbers here, 700,000 of those subscribers, of course, are from Russia, but they also noted here they gained 500,000. So that’s still pretty good. Not the 2.5 million, but 500,000 new subscribers is still decent.  

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So that 35%, in my opinion. That’s a little extreme. I think maybe 10%, maybe 15% pullback would have been sufficient. But again, we’re just going to find a stock. We’re going to punish it just because we don’t like what’s going on in the market.  

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Again, this happens. But let’s continue here with the business a little bit. And I do want to talk a little bit about the meaning because this is where things do get exciting. So with Netflix, they are known as a pure play subscription business model. They only make revenue off of subscribers or they used to.  

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Things are changing and events like this, even though it’s really painful, especially if you’re a shareholder, this is the opportunity for the CEOs. There’s two CEOs and the rest of the executive suite to make some big decisions how we’re going to change the business. You can’t just sit back and think, everything is fine. You have to take action when you take a hit like this. So they’re going from one revenue stream to four.  

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Let’s break those down. So the first one stays there’s still subscription. They’re now going to introduce an advertising model. It’s a free you can get on Netflix for free, but there will be ads, which that’s fine. We’re used to that.  

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Hulu has proven success with those models. Hulu has 45 million subscribers. They made $2.1 billion in 2021 from ads alone, Netflix has over 200 million subscribers. That’s forex the subscribers. Can they make forex revenue?  

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You have to be determined. But 2.1 billion, let’s say it was four, let’s say it was six or 8 billion that Netflix generated. That’s pretty solid. I would take that. So I think that’s a smart move to move to that model.  

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The third revenue stream relates to video games. So the video game plays. It looks like I did a little homework on what kind of games are going to release. It’s more mobile games, but what they’re looking to do is focus more on children. In other words, families.  

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And they’re trying to keep families on the platform. They’re trying to reduce churn or in other words, prevent people from leaving. And it looks like they’re going to release about 50 mobile games in 2022. Video game industry is hard because it takes a lot of effort and you’re trying a lot of different games to really get that home run that people love. And you put a lot of software engineering, a lot of development into the games creation, but it looks like they’re releasing a Stranger Things series of games.  

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There’s also, like a few sports related games. There might be some effort here. I don’t think this is going to be as strong as a revenue strategy as the advertising play. That’s pretty straightforward. That’s a win.  

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But with video games, it’s kind of in question. Still another way to increase your subscribers and keep people from churning. The fourth strategy relates to these passwords. So they’re looking about a year out to introduce a fee for each additional home you share with. The thing they’re working on with these subscribers is where do you draw the line?  

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Because there are situations where let’s say you’re a family and you have some kids who went to College and they still want to use Netflix. Yes, technically they’re different households, but they’re still part of the same family, same situation for people who travel a lot for business. Let’s say you’re away for a month. You still want me to use Netflix. Well, you’re still part of the family, but you’re in a different location.  

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So where do you draw those lines? They are still working on that. That’s why this is like a year long project or it looks like it’s going to be a year out, but they definitely want to focus on these people. They’re listing some numbers in here. There are a lot of people that they’re sharing passwords with, like 15 or more different households.  

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That’s crazy. Come on. So I think if you’re doing that, I mean, two to $3 per additional household, that’s very reasonable. I think this is a really smart way to go. So overall, I really think the revenue streams were going from one to four.  

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We’re looking pretty good from advancing the business. One main reason I did not invest in Netflix all these years and I’m kind of kicking myself because I should, because they’ve done so well. But what made me a little fearful is they only had that one stream of revenue. And when I look at some of the other business I invest in, like Microsoft or Google, they have a lot of different revenue streams in the same business model. And these revenue streams are highly scalable.  

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So that gives me a little more comfort with my investments. If one revenue stream or channel or division of the business kind of slows down, there’s others that can make up for it. So the pure place subscription, it’s clean, yes, but it’s just not quite as strong as what I’d like. So it’s cool to see Netflix kind of branch out an event like this. Like I said, there’s pain.  

[00:09:40.280]

Share prices pulled back. It’s time to make some changes, and they’re making those changes right now, which is great. Now with the advertising. I did talk about the timeline on the password introduction. Advertising looks like a very similar timeline.  

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We’re looking like a year. It could be like 2023. We’ll get to the CEOs in a second. But I would place that as their top priority. That and the password is let’s get those initiatives set up as soon as possible.  

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We need to see it’s not going to be three months, but maybe in six months we can hear some better news on the stock and get a little more confidence to start to see that share price go back up. We’re going to have to hold on a little bit right now. So let’s talk about the competition a little further. So Netflix really separates itself from the competition because it’s a global content generating platform. There’s a lot of platforms out here that yes, they are available in other countries, but like, for example, HBO has a lot of great shows.  

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I was a Game of Thrones fan and a big fan of Westworld. I can’t wait for the next season there. But a lot of the content is focused on the US English speaking consumer. And this is pretty common with most platforms. Like, I’m looking at Hulu.  

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You’ve got, of course, Disney, Paramount, Showtime, Netflix is different. They have production companies and teams in different countries producing content specific to that country. We all saw what happened with Squid Game. That was the record breaking viewership series on Netflix. That’s out of South Korea.  

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South Korea has a lot of good content coming out. Same thing with India. You look in Europe, there’s more production, more content focused on that country and that audience that’s being released. And Netflix is the best of the best. Nobody competes now in the US.  

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Yes, we’re getting close to a point where they’re maxing out their audience. And sure, we can always bring in more subscribers from the US, but there’s still opportunity around the world and introducing that advertising, that free plan with advertising and the password sharing coupled with the great content generation, that’s a big win. Also, to keep in mind, let’s think about the horizon here over the next few months of what’s coming out on these platforms. So with Netflix this summer, you have Stranger Things season four coming out. This is highly anticipated.  

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We’re talking about three years later. We’ve been waiting for this. There’s a little delay because of COVID, but can this overtake Squid Game as the top most viewed platform or the top most viewed program on the platform? We’ll see. So those of you who are leaving Netflix because of the share price try to think about what kind of content is coming out in the future.  

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We’ve seen some big success with Witcher. I think there’s Bridgerton. There’s a lot of platforms out there that are keeping people around, and what they’re starting to do is release content in a way that’s kind of broken up. Like, for example, I think it’s later this month, April, Ozark, the final season. It’s the second half of this final season actually is being released.  

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Big fan, by the way. Love the show with this. I think that’s a smart place. You kind of release these chunks that keep people engaged and keep them on the platform. Hbo, of course, what they do is they release a new show every week.  

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Right now, Disney Plus is doing that. I’m watching Moon Night, same thing. You got to wait every week for the next episode. What it does is it forces people to stay on the platform. So Netflix isn’t going all the way there, but it is kind of breaking things up a little bit.  

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So I think that’s smart. So overall, with the mode, yes, there are other competitors in the space that are taking some market share, but that global market share of producing content in different countries, that’s hard to compete with right now. There is a slight mother there. So I still like Netflix for that reason on its own. Let’s jump to the management.  

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All right, so Ted Sandos, who was hired by Reed Hastings back in 1999, Netflix was founded in 1997. So 1999, he brought on Ted Sarandos. He’s been head of contents for pretty much the whole career. Well, in 2020, he was named coCEO. Kind of a rare situation.  

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You saw that a little bit with Salesforce, two different CEOs. So here’s how the responsibilities breakdown. Reed Hastings will continue overseeing operations and strategy, whereas Sarandos will focus more on content, which I think is a great partnership. I think in the situation here, Sarandos is doing a great job. Like I said, with the global focus, serving other countries, providing content for those countries and those viewers.  

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Of course, we do see that kind of spread out around the globe with, again, popular shows like Squid Game. He’s doing great. I don’t think any changes are needed there. But Hastings, my gosh, if I were you, I’d be putting the pedal down with advertising. Let’s get that employee, let’s get that free plan as soon as possible.  

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I do understand there’s a little bit of work around the password sharing. How do you handle that? But I think if you can write some kind of algorithm or figure something out there, you can make that work. A year out feels like a little long. I think if I were a shareholder, If I were you, I’d be getting a lot of pressure from the board.  

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And let’s get these in place sooner than later. Do not wait. If we got to wait another year, the share price could go down a little more. Let’s start to see in six months and positive action happening to get a little more encouragement from the market.  

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So overall, when you look at all four ends, in this case, the financials do look really good. Again, that EPS is increasing. The revenue just dropped off a little bit, but it’s not too alarming. It’s just the subscribers, which can be easily overtaken if we add that advertising model. Financials do look good with the meaning of the business.  

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Like I said, We’ve got one revenue stream turning into four, and then you’ve got the moat. They’ve got that global market share, global content. I think that’s great. And management. I think the co CEO situation may work in this case.  

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I know I did read an article about there are certain companies that tried. It doesn’t work. This made there’s a lot to manage here at this level. And you have a global platform like this with multiple streams of revenue. I think breaking that up with responsibility, leadership responsibility is a smart play.  

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So here’s what I would do if I were a subscriber, I would wait, I would wait right now. Do not sell, but let’s wait to see what the next few earnings reports look like. I think in three months, It’s not going to be anything too exciting. But you look about six months down the line, nine months, we should start seeing some positive action, Especially more discussions around the new revenue channels. I think the low hanging fruit there is going to be the advertising.  

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I think that’s what you go after first. So let’s just watch that. If we see positive action and the share price starts to go up, that might be the trigger point to stockpile at that instance, because share price is most likely still going to be down. If you’re waiting on the sidelines in this case and you want to get in same situation, Just hold tight. Let’s put it on our watch list and ticker.  

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We’ll see if that summary changes. But otherwise, let’s see what happens these next few quarters and we’ll go from there. But I’d love to hear what you guys think. Thanks.     [/vc_column_text][/vc_column][/vc_row]