The warning signs were there, with influential Wall Street observer Michael Nathanson one week ago cutting his price target as increased OTT competition and slowing growth made Netflix a little less rosy of an investment.
It turns out Nathanson was right on the money with respect to Netflix’s overall health. Disappointing earnings and subscriber forecast misses were seen by the visual entertainment giant, leading to a Friday sell-off that saw NFLX down by more than 21% in the 1pm Eastern hour.
Yet, there’s dissent among just how poorly Netflix is performing. According to one industry observer, “Netflix’s performance is superb when you consider the crushing competition encroaching on what used to be a fast growing, greenfield market.”
That viewpoint was expressed on Friday by Todd Krizelman, CEO and co-founder of ad spend tracking firm MediaRadar.
While one may balk at the word “superb,” Krizelman offers a perspective that many, including those in broadcast media, should take note of.
“Since late 2019, Disney+, Peacock, Paramount+, Discovery+, and HBO Max have launched very high quality services (to name a just a few). There are thousands of additional streaming OTT channels available to the consumer,” he says.
Most are free. But, Krizelman believes, “The story does not change the opportunity for streaming. Rather, it reinforces the fact that the scale of the market is gigantic. This is why so many are racing to be in it! Like most sectors of media, competition is expected to be intense.”
It’s perhaps, then, another wakeup call for investors and for Netflix. Starting the alarm sounding for Netflix was MoffettNathanson analyst Michael Nathanson. On January 13, Nathanson trimmed his price target for Netflix to $460, from $465. He’s retained his “neutral” rating on the stock.
With the late Thursday release of Netflix’s results, MoffettNathanson not just lowered again the target price for NFLX — the Wall Street investment analyst house slashed it from $460 to $375.
‘OBVIOUS RED FLAGS’ FOR AN OTT GIANT
Don’t call it a vindication for Nathanson. But, he was very clear in an investor note released Friday that his long-held questions about streaming being a good business are now being asked by others.
“For many years, we have walked alone down an empty and dark road asking a simple question of whether streaming is a good business,” he writes. “Many of our clients would say, ‘Of course it is! You damn fool, look at the stock valuation and the massive equity returns that Netflix has generated.’ In fact, along the way, we might have even lost a few clients who were tired of us being wrong on the stock or just too dumb or too stubborn. So, with this as our history, please excuse us as we point out the obvious red flags in Netflix’s Q4 earnings results that should make even the most bullish analysts question their models, valuation approach and thesis that Netflix has a deep moat à la Alphabet, Apple and Microsoft and should trade at a premium to all those names.”
With slowing subscriber growth, NFLX was trading at $400.42 at 10:30am Pacific on Friday — down $107.50 from Thursday’s closing bell and from $597.96 on the first trading day of 2021. The dip puts Netflix shares at their lowest price since March 2020.
The consensus 1-year price target for NFLX remains $663.12. But, that could swiftly change, given the MoffettNathanson move.
While Netflix is promoting its “strongest content slate ever” and with much of the northern hemisphere battling (and losing to) the Omicron pandemic, MoffettNathanson put a magnifying glass to the company’s Q4 report.
In the fourth quarter, Netflix added 8.3 million subscribers. There were, surprisingly, better-than-expected results in U.S./Canada and in Europe and the Middle East. But, Asia-Pacific saw weaker subscriber growth, as did Latin America. Even with “Squid Game” becoming a phenomenon and the film Don’t Look Up considered to be a success, that may not be enough to combat encroachment from other OTT services.
Nathanson asks, “Imagine what will happen when the content slate is not this strong and/or the western hemisphere is not battling a pandemic?” As such, he is extremely concerned of the Q1 2022 net subscriber addition guidance “of only 2.5 million.” In his view, it is worrying, and evidence of growing risk in Netflix’s content model.
Nathanson then concluded that the potential range for net subscriber additions at Netflix spans from around 6 million to a high of 11 million. Uh-oh. “This seems shockingly low compared to the average of 26.5 million over the past five years,” he concludes.
While there are multiple explanations for the weaker-than-expected Q1 subscriber guide, he’s electing to ignore them and reduce MoffettNathanson’s 2022 sub add estimate by 7.5 million to 20 million. “We do not want to overreact to one quarterly guide, so we are not materially slashing our outyear subscriber forecasts now,” he says. “Yet, it is hard to have confidence that Netflix will return to the historical 26.5 million net subscriber add run rate post the 2022 slowdown.”
OTT’s RAPID DECAY
For broadcast and cable TV leaders who remain concerned about OTT, and FAST channels, the sheer number of options aside from Netflix is perhaps a valid one.
Interestingly, Nathanson observes a trend that is perhaps unique to the OTT and digital space that linear TV has avoided — quick burnout.
“[T]he decay rate on streaming content (especially content that is released to be binged in a night) is incredibly rapid,” he says. “Squid Game? That’s so last quarter. The Witcher? Done on New Year’s Eve!” Then, there is Stranger Things, which did not return in 2021 due to COVID-19-related production delays. Will audiences gravitate toward its next season or have they moved on?
With content creation and production “not monopolies,” the pressure is on for Reed Hastings and his C-Suite team at Netflix. But, its competitors may be just as vulnerable, setting the stage for a possible OTT fiscal meltdown in 2022.
“Stepping back, we see this Netflix quarter as a worrying datapoint for the rest of the streaming industry on multiple fronts. First off, as a valuation guide in sum-of-the-parts models, the selloff in Netflix’s equity makes it much harder to use as a bullish comp in the media world. Over the course of the past few months, Netflix’s stock price has declined from $700 to $400, which obviously makes it much harder to drive the ‘SOTP’ models for Disney, ViacomCBS or Discovery. Second, the blowup calls into question the end-state economics of these businesses.”
In 2021, Netflix posted negative Free Cash Flow of $159 million on revenue of almost $30
billion and global subs of nearly 222 billion. “While media companies have the benefit of fully amortized libraries and built-in marketing platforms, most streaming platform owners have RPUs that are materially lower than Netflix’s global RPU and are just beginning this journey in a more competitive market,” Nathanson concludes. “We remain cautious on this space for obvious reasons.”
