INTRO: Netflix is officially the worst performing
stock in the S&P 500 being down over 60%, and that’s just since the start of the year.
If we measure from their peak in late November, we’ll see that Netflix is down nearly 70%.
This means that you can get Netflix stock for the same price as 4 years ago, and the
Netflix has shed an eye watering $216.8 billion worth of market cap.
This is quite a turn for Netflix given that Netflix was the best performing stock of the
last decade growing over 4000% percent.
Yet, currently, they’re on the other end of the spectrum.
A few weeks ago, I made a similar video discussing the state of Netflix, and at the time, they
were already doing quite bad being down over 50%.
But, they were starting to make a bit of a recovery, and it seemed like it was just a
matter of time until Netflix would recover from the downtrend.
Eversince Netflix announced that they lost 200,000 subscribers and warned that more subscriber
losses could be coming in the future, things haven’t been looking as optimistic.
It looks like this crash may be more of a bubble popping event as opposed to a simple
market downturn.
So, is Netflix past the point of recovery?
FUNDAMENTAL DOWNFALL: The first thing to note is that we can no
longer just chaulk up this sell off to a market downturn.
While the market hasn’t been making new all time highs week after week like it was
last year, it’s also not like its down 40 or 50%.
The S&P 500 is only down about 9% and the Nasdaq is down 18%.
Such a sell off may lead to a megacap like Netflix selling off 30 maybe 40%, but not
70%.
Just look at Tesla for example.
Tesla is likely the most richly valued growth stock in the entire market, yet they’re
only down 19% from their all time high because their still killing it fundamentally.
So clearly, Netflix’s sell off has a lot more to do with fundamental shortfalls as
opposed to market shortfalls.
With that being said, the biggest challenge ahead for Netflix is continuing subscriber
growth.
Netflix and a bunch of their investors have been trying to justify their recent subscriber
loss by blaming it on Russia.
You see, Netflix had to write off 700,000 subscribers due to Russian account suspensions,
so if we exclude this amount, Netflix would’ve acutally gained 500,000 subscribers last quarter.
But honestly, this doesn’t really change anything.
Even if we give Netflix the benefit, and say that their subscribers grew by half a million
last quarter, compared to their 221 million existing subscribers, this growth is absolute
garbage.
In terms of percentages, this comes out to just 0.226% growth.
Even if we extrapolate this growth to an entire year, we don’t even get 1% growth.
For perspective, even mature companies like Apple and Google generally post 20-30% growth
numbers year over year.
Considering this, Netflix’s subscriber base is at the very least stagnating.
And given Netflix estimates that they will lose another 2 million subscribers this quarter,
this lack luster performance doesn’t seem to be a one off anomaly either.
So, what’s causing people to leave in droves?
Well, the answer is quite straightforward.
The primary reason that people cancel subscriptions is because they feel that its no longer worthwhile.
For the longest time, Netflix has not only been losing some of their best content, but
they have been constantly increasing prices.
Currently, Netflix charges $9.99 for the basic plan or $120 per year.
Meanwhile, Disney + costs $8 per month and they have annual plan that costs $80 per year.
So, by getting a Disney+ subscription, viewers can not only save up to 50% on subscription
fees, but they can arguably get access to better content.
While Netflix does still have a large lead in terms of total movies and TV shows against
Disney, this doesn’t really mean much given that the average person doesn’t care about
the vast majority of the content on Netflix.
Conversely, while Disney+ has a smaller catalog, everything they do have is bangers from Star
Wars to the Avengers.
Something else to note is that it’s not like Netflix had to make this price increments
either.
Much of their price increases over the past 6 years have gone directly to their bottom
line.
Since 2016, Netflix’s net margin has exploded from about 2% to 17%.
And it seems that as Netflix’s profits went parabolic, their value proposition fell off
a cliff.
RAY OF HOPE: While it seems like Netflix is just going
to continue losing content to competitors as production studios open up their own streaming
services, there is some hope for Netflix.
After I posted my last video on Netflix, a subscriber actually reached out to me and
let me know Netflix actually has a lot of background licensing deals that have yet to
come to fruition.
For example, Netflix apparently has a deal with Disney to license all of the movies that
came out between January of 2016 and December of 2018.
The catch, however, is that Netflix can’t start streaming these movies until 2026.
This gives Disney 4 more years to eat into Netflix’s customer base.
And given that Disney+ already has 129 million subscribers and that Disney+ has only been
a thing for a little more than 2 years, this doesn’t bode well for Netflix.
Aside from having plenty of time to steal customers from Netflix, Disney will also has
8 years worth of backlog content between 2018 and 2026 that Netflix wont have access to.
And I doubt that Disney will be making any such deals with Netflix moving forward.
This applies to all the other production studios as well.
While they may be tied up with Netflix for several more years, you can bet that they
won’t be extending such deals much further.
So, really, the only solution Netflix has for this conundrum is to make their own content,
and this is fortunately exactly what they’ve been doing.
But, the problem is that most of their originals are hit or miss.
While you have some mega hits like Squid Game, the vast majority of their original shows
don’t receive much fanfare.
Now, this isn’t exactly Netflix’s fault.
It’s simply the nature of the media business.
You often have to swing several times to hit a home run.
The problem though is this process is not only capital intensive but time intensive.
Production studios like Disney, Warner Brothers, and Paramount Studios have literally been
swinging for over a hundred years to produce the classics that we all know and love today.
Meanwhile, Netflix has only been swinging for 10 years.
So, it’s no wonder that they’ve been struggling to build up the catalog that their competitors
have.
Something else to note is that Netflix’s streaming model has inadvertently made it
a lot harder for them to retain customers.
Generally, whenever Netflix launches a new season of a show, they post the entire season
right away.
Now, I’m a massive fan of this approach.
Being able to simply press next episode after a crazy cliff hanger is so nice.
But, from a business perspective, this is not that great.
Over the years, Netflix has created a phenomenon that a lot of us are extremely familiar with
and that’s binging.
The best bingers amongst us are usually done with a season by 5 am the next morning.
But, even if you’re not that hardcore, you’re likely done within a week.
With regular TV, you would’ve had to spend months if not years watching the same show.
And the opportunity to binge has made it extremely convenient for customers to buy a netflix
subscription for a month and then instantly cancel.
And as you would guess, this is not that great for customer retention or long term profits.
A NEW UNDERDOG: It’s no secret that over the years, our
attention spans have been continuously decreasing and the best evidence of this is the rise
of TikTok.
Initially, this was actually one of the main reasons that Netflix even did so well.
People didn’t have to wait months or years to watch a show, they could binge over a few
weeks.
But, the problem is that the average person’s patience and attention has shrunk even smaller
and Netflix has struggled to keep up.
One of the worst parts of watching Netflix is trying to find something good.
Oftentimes, I spend 20 to 30 minutes just scrolling through Netflix and looking up reviews
until I finally find something to watch, and I’m sure a lot of you can relate to this.
Meanwhile, YouTube and TikTok have perfected their content recommendation algorithms which
give us an endless stream of content to watch.
Statistically speaking, 82% of you guys didn’t search up this video, rather, it was recommended
to you.
Only 5.6% of you guys actually looked up this video.
And while, the YouTube search box is still super helpful if you’re trying to find a
tutorial or a review about a certain product, for casual entertainment, refreshing the home
page until you find something good to watch is usually the way to go.
With Netflix, however, you can’t really do this, and this brings up a serious question.
Is it actaully Disney+ and Hulu and Paramount+ that are stealing Netflix’s watch time?
Or is it YouTube, TikTok, Instagram, and SnapChat.
About 10 years ago, we had a very similar situation with Netflix and traditional TV.
TV channels were bleeding watch time like crazy, but it wasn’t other TV channels that
were stealing it from them.
Rather, the culprit was Netflix.
Similarly, I believe the culprit today is actually social media.
After all, TikTok was literally the most visited site in 2021.
So, Netflix is not only competing against production companies but also social media
companies.
And while Netflix may have a chance against the production companies, I’m not as optimistic
when it comes to their chances against social media.
HISTORICAL COMPS: By now, I think we’ve made it pretty clear
that Netflix isn’t doing that great fundamentally.
This isn’t to say that Netflix is gonna file for bankruptcy anytime soon, but it does
look like they’ve hit a local top.
And the question is: can Netflix adapt to changing times and keep this a local top or
will this become an absolute top.
Well, to answer this question, we can take a look at historical charts of other companies
that underwent a similar crisis like Microsoft.
Throughout the 80s and 90s, Microsoft crushed it as personal computer adoption went to the
moon.
But, by the early 2000s, Microsoft hit market saturation and this is also coincided with
the dotcom crash which left Microsoft devastated.
During the dotcom crash, Microsoft shed a total of 66% which is quite similar to Netflix
today.
The thing to note though is that it took Microsoft 16 years to recover and make new all time
highs.
Now, if Microsoft had embraced the smartphone boom, I think they could’ve made this recovery
much sooner maybe in 2009 or 2010.
But they didn’t, and it wasn’t until the embraced the cloud computing boom that they
finally took off again.
Now, with Netflix, I think they’re already too late to really capitalize on the social
media/user generated content boom, so like Microsoft, they’re gonna have to turn their
attention onto the next big thing.
Maybe, that’s VR and AR content, I’m not sure, but one thing I am sure of is that making
such a transition will take quite a bit of time.
Combine this with the fed tightening and a great deleveraging potentially around the
corner, and Netflix may not make new all time highs for years to come.
Also, let’s not forget that there is no guarantee that Netflix must make a new all
time high in the first place.
Given their current situation, they could easily end up like Cisco or Intel.
CAN NETFLIX RECOVER: While this video has been quite critical on
Netflix, I’m still leaning on the side of betting that Netflix will eventually recover.
Even though their user count is stagnating, I don’t think their innovative spirit is
stagnating, and I’m rather confident that Reed Hastings will figure something out by
opening up Netflix to a new market.
With all of that being said though, this type of transition wont take place within a matter
of 6 or 12 months.
For a mega cap company like Netflix to pivot into new sectors and make these endeavors
profitable, it’ll take several years.
And in the meantime, investing in Netflix is really just a toss up.
Given how oversold the stock is, we may see a recovery back up to $400 or $500.
On the other hand, if the market really starts to sell off as the fed tightens, there may
be a lot more pain to come for Netflix.
Either way though, for Netflix to become the fundamental king that they were in the 2010s,
I think it’s gonna take several years of trial and error.
And personally, I wouldn’t invest serious capital into the company until they figure
out another mode of growth.
But that’s just what I think.
Would you guys invest in Netflix?
Comment that down below.
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