THB #73: Netflix Is Chilled
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Why are these men so happy?
When Netflix Masters of the Universe Reed Hastings, Ted Sarandos, and Spencer Neumann released their quarterly investors video interview 2 hours after their quarterly results were released, they came off as giddy. (The images are from the first appearance of each man yesterday.) The stock had already dropped 20%.
They argued, in their digital bubble, that the quarter was pretty good. Reed Hastings scoffed at any worries about missing their sub growth projection for the quarter, “8.3 million versus 8.5 million, I mean...”
I can’t really argue with that. Except that in the years past, had they been over projection by .2 million, instead of under, Wall St would reward the stock handsomely.
What happened yesterday and continues today is that the facts of perspective that some of us have been writing about for years now came home to roost on the news of a very normal-looking Netflix quarter.
Last quarter announcement, Q3 on Oct 19, 2021, the stock dropped 14 points the next day from $539 to $525. That was only a 2% drop. And then, 10 days later, the stock was up 8%, close to its all-time high at $690 a share.
That is the history of this stock. Q3 was not as solid as Q4. But after a small dip, the bulls kept talking it up and buying it up.
Today, after the nearly instant stop of 20% yesterday after market, we didn’t see people buying that huge dip. More people got out. Depending on what moment on Friday, January 21 that this newsletter is published, Netflix’s stock will be down somewhere between 20% and 25% from January 20.
But it’s worse than that.
The stock closed at 691 on November 17, 2021. It’s dropped 43% since then.
So… why?
I have believed that Netflix is a strong company with a solid future for a little longer than I have thought that the stock price was out of control. Listening to much of the analysis today, I am hearing arguments I have been making for a long time. And some that reach beyond what I would consider reasonable. No time to become Chicken Little: Streaming Screamer.
All of a sudden, the stock market seems to be rethinking the entire take on streaming.
Well… yeah. The bubble of the Wall Street fantasy that spending 70% of your total revenue on content is a good business model for a mature company carrying a load of debt - and that you should keep growing that spend - seems to have burst.
But the idea that you need to spend more and more on original content to build a successful streamer is still floating out there. Disney added an insane $8 billion to their annual content budget a few months ago and they are still getting kicked by the market today. It’s not enough for some people.
Netflix got hoisted on its own hype this week. How could the mind-numbing success of Squid Game and the terrible but well-viewed Red Notice and Don’t Look Up not generate a suprising uptick this quarter? If they can’t do it, nobody can!!!
The market is so desperate for a straight answer from Netflix that they took this quote from Reed Hastings to be an acknowledgement of the competition being an issue: "There's more competition than there's ever been. But we've had Hulu and Amazon for 14 years. So it doesn't feel like any qualitative change there.”
How big is the worldwide streaming sub market? Not what promoters of Netflix have suggested. “Netflix is at 222 million worldwide subs and there is 3x or 4x that available even without China” was also a load of poop and the scent hit the market yesterday.
Wall Street has had a crazy crush on Netflix. And not without reason. Netflix has been the handsome, wealthy, powerful quarterback. No matter what has happened, they have found a way to win.
But now, the honeymoon phase is over as every honeymoon ends. Wall Street is wondering whether they want to spend the rest of their lives waiting for “him” to come home from his drinking nights with the boys, picking up his underwear off the floor, taking him to the doctors office to have the pain eased from what will be permanent physical pains, etc. They look around and they see the other star players to whom they might leap from their new perspective… the idea of trading off the one they have to jump to the side of another one that will have most of the same issues… not so exciting.
Netflix is a terrific $200 billion company. The stock price has dropped almost low enough to reflect that.
The concerns that Wall Street is having this week are completely reasonable, in that perspective.
What is not reasonable is the idea that the streaming business sucks and everyone is going to fall over the edge of the cliff now. Streaming is the future of television. There is zero question. It’s here and its going to keep eating the world.
But I don’t trust Wall Street to keep perspective and not to start crushing on Netflix again. One sign of a revived crush energy would be more otherwise-smart people pushing the irrational argument that Netflix is a tech company. It hasn’t been that for years. But people do love to make the argument.
However things work out, over the next couple of weeks, Netflix will have a new perspective. But this is not only a Netflix issue. It is an issue for the entire film/tv industry. Bob Chapek has torn Disney up under the premise that streaming is everything (a wild exaggeration… and not). How David Zaslav relaunches WBDisco will surely be influenced by where the market and the world perceive expectations for the next 5 years of streaming. Choices by Comcast certainly are up in the air again. How the smaller players are valued will be changed by the light that Netflix brings or does not.
Weirdly, what we see, in part, is the story coming steadily back to the idea that what has been seen as legacy or linear can be pushed in whole onto the internet without as much disruption as has seemed to be inevitable in the last couple years. I think that is a who different kind of overreach.
But the story Netflix told this week is, in the Book of Streaming, in its first few chapters, not close to the Big Reveal yet. The wild ride continues.
Until tomorrow…