Checking in on Netflix

Yankees legend Yogi Berra was once asked whether he wished to have dinner at a fancy restaurant to which he replied, "nobody goes there anymore, it's too crowded."

The streaming services can relate. 

Netflix put out quarterly numbers yesterday; it was the first time in company history with two consecutive quarters of subscriber declines.  

Netflix revenue also slowed down (only up 8.6% versus last year) to its lowest growth rate since Q4 2012.

And the company spent $70 million in severance cost to lay off an estimated 5% of their work force.  ($70 million! Is there a better inflation hedge than getting laid off at Netflix?)

However, the bad news was priced in -- the stock shot up ~8% on the report.  This could be a good sign for the rest of earnings season; sentiment is so low we're rallying on "less bad news".

CEO Reed Hastings said "Losing a million subs and calling it a success is tough.  But really, we're set up very well for the next year." Could he be right?  Hastings does have a 20+ year track record at Netflix of tackling big challenges and coming out on top.  

Despite the competition, Netflix is the only service with true "scale".  Look at their revenue compared to competitors. (Via @TSOH_Investing)

If Netflix is the Yankees, the only other streaming service in the major leagues is Disney.  Disney has grown at a remarkable clip in only a few years but the next few years could get harder if they balk at the spending required to keep growing. 

Despite competition, Netflix still owned more viewing time during the '21-'22 TV season than any other outlet.  And they nearly matched the combined total of the two largest broadcast networks.  

Netflix share of US TV viewing reached an all-time high of 7.7% in June (vs. 6.6% in June 2021), which shows their ability to grow engagement while continuing to improve the service.

Like many businesses before them, when growth slows, it's time for advertising.  Netflix recently partnered with Microsoft to start tinkering with an ad supported version.  They will likely start in small markets and grow into bigger markets over time.

(There's a joke in there somewhere that Reed Hastings is morphing into Ashley Schaeffer -- transitioning from selling BMWs to KIAs.)

It feels obvious advertisers are dying to get in front of Netflix's audience.  With their original content, they could do some huge brand advertising deals similar to James Bond with Rolex, Heineken, and Aston Martin. 

Maybe not those high end brands but something like "Miller Lite being the official beer of Ozark" could be done without annoying viewers. 

If you hate Netflix or love Netflix, there was things in this report to confirm your priors ... same as it ever was.  Reigniting their growth path will be a challenge but Netflix is a capable fighter.  Good luck to all who invest (no position for me).