INTRO: We all know Netflix is massive. They were the
OG streaming service that destroyed Blockbuster and gave cable TV providers a run for their money.
But, did you know that Netflix was not only a strong performing stock but the best performing
stock in the S&P 500 for an entire decade? If you invested money in Netflix at the start of 2010,
you would’ve nearly 100xed your money at the peak. For perspective, with Amazon, you would’ve
roughly 33xed your money, and with Apple, you would’ve roughly 25xed your money. Considering
this stellar performance, Netflix is often grouped with the top tech companies in the world
even though it’s only a fraction of the size. Once the pandemic hit, Netflix stock just skyrocketed
even more as people binged shows and movies on Netflix as they didn’t know what else to do. But,
over the past couple of months, Netflix hasn’t been doing so hot. In fact, Netflix is down over
50% within just the last 4 months which correlates to a $150 billion loss in market cap. This makes
Netflix the 5th worst performer in the S&P 500. So, here’s how Netflix went from being the #1
stock in the S&P 500 for a decade to being part of the bottom 1% all within a matter of months.
DEPENDENCY ISSUES:
One of Netflix’s most deep-rooted problems is that they’re dependent on traditional TV
and movie industries for content. In other words, Netflix’s ability to have a large and
diverse library of content is extremely dependent on how many licensing deals they’re able to make
with production studios. Now, Netflix has been well aware of this since the very beginning,
and that’s why one of their biggest focuses has been producing Netflix originals. And over the
past decade, they’ve pumped out several phenomenal series like BoJack Horseman,
House of Cards, and of course Squid Game. Aside from these originals, they’ve also bought
tremendous shows like Money Heist and Lucifer. But at the end of the day, Netflix’s original
content and strategic purchases only account for a fraction of their entire library. This means that
if production studios were to boycott Netflix for one reason or another, Netflix would lose most of
its content and probably a significant portion of their subscribers. From the very beginning,
many studios have refused to license their content to Netflix, and with time, the proportion of
studios that refuse to work with Netflix has only increased due to the rise of competitors.
By far the biggest competitor against Netflix is of course Disney+. Disney didn’t even launch
their streaming service till November of 2019 or just over 2 years ago. But, despite their recent
entrance into the market, they already have nearly 130 million subscribers. For perspective, Netflix
currently has 221 million subscribers. So, Netflix does still have about 90 million more subscribers,
but if Disney was able to make up half the ground within 2 years, imagine where they’ll be within
5 or 10 years. It looks to me like it’s just a matter of time until Disney+ surpasses Netflix in
subscribers, and the key reason for this is that Disney is a full-on production company. First,
they have Walt Disney production studios with all the classics including Aladdin,
Alice In Wonderland, Frozen, and Moana. Then, they have Pixar which includes Soul, Coco, The
Incredibles, Cars, Finding Nemo, Inside Out, Toy Story, and basically every other animated movie
you grew up with. And then, they have Marvel which includes the entire Marvel cinematic universe from
Iron Man to End Game. The only thing they’re missing is a few Spiderman movies. And then,
they also have the entire Star Wars universe and we can’t forget about the Mandalorian. And then,
they also have a large library from National Geographic. And then on top of all of that,
they have a few oddball movies too like Avatar. And Disney owns the full rights to almost
everything we covered. With that being said, Disney isn’t dependent on licensing from anyone
because they already own everything. In other words, Disney is a production company that
launched a streaming service while Netflix is a streaming service that does some production.
And as more production companies launch their own streaming services like Paramount plus,
it’s just going to become harder and harder for Netflix to retain content and subscribers.
PANDEMIC BLUES:
Moving onto Netlix’s second-biggest issue, we have the pandemic. Now, this might be a bit confusing
as the pandemic was originally hailed as a golden ticket for stay-at-home businesses like Netflix.
But, long term, I think the pandemic was actually negative for Netflix for two
reasons with the first being consumers’ openness to try other streaming services. Here’s the thing,
most people who were into streaming shows and movies already had a Netflix subscription before
the pandemic started. What they didn’t have was a Disney+ or a Paramount+ or a Hulu subscription,
and the main reason for this was that they didn’t want to pay for more than 1 streaming service on
a regular basis. When they were stuck at home though, it made a lot more sense to pick a few
more subscriptions. Now, to be honest, most of these guys have likely gotten spoiled with
having all these subscriptions, and they won’t be canceling any of them anytime soon and this
includes me as well. But for people who actually have a social life and do things other than
watching YouTube and movies, it may not make sense to pay for all these streaming services and they
may cut back down to one streaming service. Now, this brings up the question of which subscriptions
will they cancel, but honestly, this doesn’t even matter because the net gain will always be in
favor of the competition. For example, Disney+ has gained 100 million subscribers since the start of
the pandemic while Netflix has gained 40 million subscribers. Now, let’s say 10 million subscribers
who have both subscriptions decide to cut down to just one. Even if all of them choose to stay with
Netflix, Disney+ had a net gain of 90 million subscribers which is over two times Netflix.
Also, realistically, the split will likely be closer to 50/50 and might even lean in Disney’s
favor. Moving onto the second reason that the pandemic was bad for Netflix in the long run,
we have the seriousness of the competition. Before the pandemic, the streaming business was simply an
addition to many production companies’ businesses. But during the pandemic, streaming became one of
their top priorities. Take Disney for example. Before the pandemic, they were consistently
launching movies that pulled in over a billion dollars at the box office, and they had theme
parks all around the world. When their revenue from theatrical releases and theme parks go to $0
overnight, where do you think they’re gonna shift their focus. The answer is obvious: streaming.
Many big box films like Soul completely skipped the theaters and launched directly onto streaming
services. And it’s not just Disney either, this scenario is applicable to all production
studios. All of them had much more to gain from the pandemic, and they all started taking
streaming much more seriously, so the pandemic was actually relatively a harmful event for Netflix.
MARKET SATURATION: Even if the pandemic didn’t happen and Netflix
didn’t have a dependency issue, they still have a massive hurdle to cross which is sustained growth.
Here’s the thing, Netflix has basically put all of their eggs into the basket video streaming,
and this makes sense because they need to focus on maintaining market share against production
studios. But, let’s say they do it. Instead of losing to Disney+, let’s say Disney and Netflix
become a duopoly within the streaming industry, what happens next? Well, the answer is market
saturation. Sooner or later, everyone who wants a streaming subscription will have a Netflix
subscription. You could argue that Netflix has already reached this point given that they missed
subscriber growth targets and are forecasting weak growth moving forward themselves. But even if you
don’t think Netflix has reached market saturation quite yet, how much more could they really grow?
300, 400, 500 million subscribers? Even if they’re able to grow to half a billion subscribers,
that’s only a little more than a 2x from where they are today? Now, this isn’t a bad thing, as
companies mature, they obviously can’t put up the same growth numbers. But, with that being said,
these companies should also no longer be valued as growth companies. For much of Netflix’s history,
their PE ratio has hovered well above 100, and even with the recent decline, they’ve maintained
a PE ratio over 30. So, maybe the recent decline is just the market adjusting to the fact that
Netflix is no longer the insane growth company that it once used to be. Every maturing company
faces this same issue sooner or later. Some of them learn to diversify and grow through
alternate streams of revenue while other companies just stagnate for a while at the top before they
start declining as more innovative companies take over their market. Apple, for example, faced this
same issue in the mid-2010s. iPhone sales were not only stagnating but declining. At first,
Apple tried to combat this by raising prices on their iPhones to increase profit margins,
and that’s kind of what Netflix is doing right now. But, the thing to note is that even Apple
realized that there was a limit to how much you could raise prices, and they would lower their
launch price with the iPhone 11. So, Netflix can’t just keep raising prices to substitute for growth.
For Apple, the answer to slowing growth was focusing on services like Apple Music, Apple Care,
iCloud, Apple TV, and so on and so forth. In other words, the key was to offer more value to existing
customers as opposed to trying to gain new customers. Netflix is trying to do this as well
with services like Netflix Games. But, the problem with such endeavors is that they’re usually hit
or miss. Sometimes, a new service is exactly what customers were looking for. Other times,
not so much. So, the market doesn’t want to give Netflix too much credit until it’s proven that
they have a future in something other than just video streaming which they’ve nearly saturated.
UNCERTAIN FUTURE:
Looking forward, it’s not like Netflix is going anywhere anytime soon. We can’t say
that Netflix is too big to fail given that we’ve seen far larger empires getting wiped
out time and time again. But, given Netflix’s size, this is definitely not something that
would happen overnight. If Netflix were to fail, it would probably be similar to something like
Dish network. It would start with a decade of stagnation followed by a decade of subscriber
losses to the competition followed by the decade in which Netflix would actually collapse.
So, Netflix has at least two decades to figure something out here whether that’s
expanding their services into gaming and live streaming or whether that’s becoming a full-on
production studio themselves. Given how much time Netflix has, you would think that they’re safe,
but then again, you could’ve said the same thing about Dish 10 to 15 years ago. Now, personally,
I think Netflix is a much more innovative company than Dish. After all, Netflix is more of a tech
company than a media company, so I’m sure they’ll come up with some creative solutions,
especially with Reed Hastings at the helm. So, I doubt that Netflix will end up like Dish, but only
time will tell. Who do you guys think will win the streaming wars? Comment that down below. Also,
drop a like if you think that Netflix will always be the OG streaming service. And of
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