I am amazed that so many analysts are shocked that the Netflix share price took a spanking after subscriptions didn’t rise by the expected two million but fell by 200,000! The Company says it will get worse. Netflix expects to lose more subscribers as growth slows, recession and inflation hits, and competition in the streaming wars hots up. Of course, there will be buyers out there thinking Netflix is now a cheap stock. Nope. It’s still trading at a disruptive multiple, although it’s now a broken dream. The reality is a deeper repricing to reflect its “now” reality: struggle and costs.
The key is that we now know Netflix’s subscription base is not infinite but limited. Investors have to calculate their future returns based on a constrained and highly competitive market and work out just how it will generate returns while having to spend billions creating content to merely stand still. It will be attritional. When Netflix is only making $1.2 billion a quarter in profits, that ability to spend future subscriptions on present content becomes limited.
Netflix’s problem is simple: it innovated the sector, spawned competition where margins are thin and under increasing pressure, yet lacks any meaningful moat as the market continues to evolve. It is desperately racing to build margins and profit in an increasingly saturated market. In a highly competitive market and with limited profits, a huge earnings multiple is not sustainable. Put simply: Netflix got mature before it got rich. They are fighting for their future on multiple fronts which is never a situation you’d pick. They have some great programming. Bridgerton and the Crown have broken the mould of conventional drama. Stranger Things and Narcos have become breakout hits. You can find excellent content like the quirky Robots Sex and Death, The Umbrella Academy, and many, many duds. But they don’t have the franchise power of Disney to monetize everything from the Mouse, Thor and Skywalker. One day Netflix may stumble on a motherlode but aside from Stranger Things what multiple season programmes have thrived?
They can create or commission their own content or license from others. That was how Netflix grew; licensing popular series like Friends and both versions of The Office, effectively renting old hits to their developing subscriber base. As the big content owners have opened their own services, Netflix’s access to legacy programming has largely shut.
Netflix is now talking about a new model. Advertising, higher charges and cutting shared subscriptions. Netflix might have been the number one streamer. Today it is fighting for its existence. Without the depth of capital or a back catalogue, it’s more likely to become an also-ran and maybe an acquisition target. Not everyone can win in the streaming wars.
I’ve been warning about the dangers to Netflix from an increasingly saturated market for years. As regular as clockwork, the market gets exuberant every 20 years or so, and binges on the latest fad. Coal, railways, steel, ships, cars, planes, computers, dot.coms, and latterly disruption. The art of finding new ways to do old things worse. Companies rise. Companies fall. Few Corporates survive more than a couple of decades at the top. Their brief years of innovative glory and stellar multiples are surpassed by the momentum of the next new, new thing, increasingly sclerotic and greedy management, the rise of internal bureaucracy, and eased towards obscurity by the dull, dead hand of regulation.
It’s called evolution. Some species thrive, but most end up evolutionary dead ends. A surprisingly small number of highly successful companies have generated the bulk of returns throughout stock market history. Whatever happened to them, names like US Steel, Shell, Bethlehem, ATT, Sears, Marks & Spencer and a host of others?
The last decade has been a break from the evolutionary rule of corporate decline and fall. Today it’s still true that very few companies matter, but a surprisingly large number of firms have achieved billion-dollar-plus valuations, often without the intermediate step of actually making any money or building much of a market for themselves. Their success has much to do with the “disruptive tech” founding myth that every great idea can be monetised into gazillions, profitable or not, but also to do with five factors around markets. First, the vast amounts of liquidity slopping around the markets due to monetary distortion, making any snake-oil maker look like a relative value screaming buy. Second, euphoric markets where everyone comes to believe equities can only ever go up. Third the monetisation and groupthink of analysis, where every stock analyst puts a buy on every stock. The critical faculty of the market has vanished. Fourth is index investing. There is no such thing as smart investment management. It’s become the business of milking retail fees for the least effort. Buying the index is simply what the market believes rather than the investment reality. Finally, the rise of the stock-picking superstar. Investment show-people who make lots of noise supporting their favourite stocks, which they also happen to be heavily invested in. In the past, stock gurus were dull, boring, and considered individuals with genuine smarts like Ben Graham and Warren Buffet. Analytical, reliable and focused on fundamentals. Today’s stock mavens are money harvesters. Noisy, frenetic marketing geeks seeking your pension savings with a message about their “unique” mindset and talent and usually barking about their skills predicting the future through their mastery of disruptive tech. So step aside Cathie Wood, Masayoshi-Son and the hat-stand legion of meme-stock pundits on Reddit. Your time has gone.
FAANG is now a dead concept. Coined in 2013, FAANG described the five most popular and then best-performing American technology companies. Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (formerly known as Google). Facebook is toast, killed by newer advertising and social media platforms and regulation. It’s now trying to reverse itself into the Metaverse. A steam train in the age of regional jets. Alphabet is struggling with a gloop of regulation sucking the life out it and increasing consumer dissatisfaction. Amazon faces a host of problems and frankly looks tired. Netflix looks old and vulnerable.
Which leaves Apple. Have you looked at the price of a new MacBook recently? You need a mortgage to buy one.
Netflix’s no-shit sherlock moment came with its numbers. We’ve long been warning about how it faces a triple whammy of growing and monetising its subscriber base, increased competition, and constrained consumer discretionary spending. As the numbers showed 1.5 million British families have already cut at least one subscription since lockdown. That number will increase across its entire user base as recession strikes later this year. She-who-is-Mrs-Blain is asking why we need Disney, Starz, Apple, Netflix and Britbox when we practically never watch them – not that’s there is anything to watch.