Netflix has been a life-changing investment for many investors. Since its monthly IPO close, the DVD-by-mail specialist and streaming leader have generated more than 47,500% gains. This makes the streaming giant one of the best-performing growth stocks over the past decade.
The last few decades have seen enormous technological changes, with new industries springing to life and challenging previous secular trends and habits. Changing the outlook of an entire nation from cord-cutting to on-demand video streaming was a far cry from the company’s humble and moderate plans. Being the trendsetter or odd one out takes more than just a business plan. It requires grit, innovation, and persistence.
They have brought paradigm shifts to conventional methods. Its foundation was built in 2007 when they came out with ‘Streaming .’ In 2013, it gave birth to ‘Original Content’ and ‘Binge-watching.’ And 2021 looks like a ‘Video Game’ frenzy time.
They have continually brought secular trend changes and are coined as the “Disruptive Streaming Giant.”With some background, let’s hop onto some details-
One Platform
Netflix has always wanted to be a “one-product one-company.” Their philosophy is to come up with complementary models to serve the “one-product.”
These are the CEO’s words-
“You know, think about it, when you watch a show from Netflix, and you get addicted to it, you stay up late at night; we’re competing with sleep, on the margin. And so, it’s a vast pool of time.”
Netflix is widening its spectrum with new ideas and stories to keep the viewer glued. They will do everything to steal that extra minute of run time for you. They are coming up with diverse combinations of product mixes to keep you hooked. I have mentioned a few-
- Mobile-only plan- Netflix has launched a mobile-only program in five markets, wherein the consumer can only stream on their mobile devices. It has proven to be effective in terms of new customer acquisitions, better retention, and revenue-neutral.
- Interactivity- Netflix has already dallied with special interactive shows, like Black Mirror Bandersnatch and You vs. Wild, where the audience can shape the story by making choices. The pixels are coming to life! How interactive and innovative is that?
- Gaming: The management’s approach towards things has always been incremental. They will test the value of the product or service. Twitch and tweak it before putting it back to action. Their approach allows them to keep the initial investment lower and progressively build exposure to things, thus, increasing the odds of success.
- Think Netflix Originals: And now it seems they’re ready to break new ground by foraying into Video Games. They are doing no different with their gaming bet. Their incremental focus is on a new content category- mobile games. Inclusion with the standard subscription fee to improve the existing experience and make Netflix a must-have. They have hired a few executives from Electronic Arts and Facebook.
- Netflix. Shop: This is yet another complementary to get the crowd talking about movies, shows, and characters. Their motive is not to generate a profit pool or expand this arena but to get people talking about that new show that everyone is watching or that character who is so evil.
Current Quarter
The tectonics have shifted a bit since the last two quarters. The subscriber front has seen significant geographical changes. Netflix added 1.54M subs in 2Q 2021, beating the consensus and management guidance. The company saw a substantial loss of reserves in the United States and Canada region, where it lost 433k—netting off the gain of 448K the previous quarter.
The YoY subscriber growth can raise numerous questions about where things are headed. The upsurge in subscriber growth during Covid can be mainly explained by Stay at the home trends and policies. But if the trend was to stay, why are we seeing a fall in subscribers? The average subscriber growth over the last five years is 23.54%. However, this quarter’s YoY subs growth slowed to 9%. Is this just a rest phase for another leg higher in subs growth? Or are things taking a detour?
A few reasons that get the limelight are-
- Cancellations- A recent survey on why subscribers canceled their subscription clearly shows that the higher cost has been the sole reason. The second one points to the lack of good movies.
- Reopening- The fall in subs growth can be back-tracked to the reopening of economies of North American and EMEA nations in stages. The dopamine hit of the Stay-at-Home trend was taking a slight pause. Likewise, there was a slightly more acquisition of clients in Brazil and India during Q2 2021 when things tightened again.
- Pandemic distortion- The pandemic has caused an unusual stretch in EPS and Revenue numbers and distorted the YoY numbers.
- COVID Choppiness- The pandemic had slowed the content slate and lingering uncertainty. Once the choppiness fades away, the management can have a steady flow of content, and churn will help the business enter a typical growth trajectory.
Here is a peek into their regional breakouts-
Additionally, the company has repurchased 480.27M shares and plans to take further buy-backs situationally and depend on its strategic objectives. The company is on the cusp of being free cash flow and has delivered significantly. The debt to EBITDA is down to 2.3x (Q2 2021) from 4.6x (Q4 2020).
The management expects Q3 2021 to play out like Q2 2021 due to not many changes to the fundamental business. They are slowly moving out of COVID choppiness and into a new phase, where their focus can switch back to the content slate.
Management’s guidance into Q4 is to return to a strong slate, and the seasonality should aid in pushing in the numbers. The administration believes the second half of the year to be quite expected.
Competition
As you see competition raging in the streaming industry, one can view it as complementary or taxing.
The streaming industry is not looking to take a breather. It ramped exponentially, and there are still gaps to be filled. New competition, new content give us all the more reason to buy Smart TVs and unlimited broadband, fundamentally aiding competitors like Roku, Disney+, and Amazon Prime. With only 20% penetration into broadband homes, in total, there are around 800 to 900 million broadband homes around the world ex. China.
The argument is built that there is a massive runaway. The question now arises here: Should Netflix build on the existing foundation to a leg higher in subs growth?
Or consolidate onto current subs and widen their vision with newer things?
While the tipping point for growth in terms of subs and competition can be near. And where different providers are creating captivating amounts of content, it has become even more challenging to capture market share. Netflix’s ultimate goal is to capture a share of screen time.
Future Outlook
It’s fascinating to see the management’s passion and love for the Netflix core business. They have constantly made things around and for the core, unlike the crowd who want a chunk of everything.
During the Q2 2021 call, Reed Hastings drove the point -one product one company- home theoretically again. They are making efforts to accommodate additional elements to the central business.
Usually, the ideation phase always seems fancy and marketable. It gives you the jitters about what the company will do and that it will pan out flawlessly. The critical part is always the execution and the response to this execution. Netflix increases their odds every time they delve into new and innovative things because of their track record and resources. Similar to – “Not guilty until proven otherwise.”
This is what ‘future’ really means to Reed Hastings-
“Sometimes employees at Netflix think, ‘Oh my god, we’re competing with FX, HBO, or Amazon,”
“but think about if you didn’t watch Netflix last night: What did you do? There’s such a broad range of things that you did to relax and unwind, hang out, and connect–and we compete with all of that.”
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