by Sven Parplies, Euro on Sunday
Dhe gentlemen around CEO Reed Hastings are in a good mood. There is joking, laughing. Self-praise shouldn’t be missing either: The Netflix show “Squid Game” has become a global phenomenon. With “Red Notice” and “Don’t Look Up” Netflix managed the biggest film starts of all time. CFO Spencer Neumann summed it up in the top management conference published on the YouTube video portal.
But there is one problem: the number of subscribers hasn’t grown as much as one would have liked, Neumann states. Specifically: Netflix’s customer base increased by 8.3 million in the fourth quarter. That’s 200,000 fewer than the company had promised. The disappointment came in a quarter when the streaming service launched an exceptionally large amount of prominent content.
The business outlook was also disappointing. For the current quarter, Netflix only calculates with 2.5 million additional subscribers. That would be 1.5 million fewer than in the first quarter of the previous year. From the stock exchange’s point of view, these are sobering figures. Although Netflix is now a media giant with 222 million customers, this has long been reflected in the share price. Over the past ten years alone, the stock market value has risen by more than 5,000 percent to $310 billion. The concern now is that the company may have peaked.
tough competition
Two interpretations of the Netflix world collide: The skeptics have long been pointing to the intensifying competition between online video stores. Alongside Amazon, Google and Apple, Disney in particular is a dangerous rival because the mouse house with its film studios and strong brands produces films and programs on a massive scale. Competition is changing the market: production costs are likely to continue to rise in the battle for the best heads and screenplays; Price increases for viewers will be harder to enforce; Customers are likely to jump more between providers, making reliable planning more difficult. Netflix would be at a painful turning point: Brsians love high-growth companies – but quickly say goodbye when the growth momentum slows down.
Netflix’s profitability also remains a hot topic, with negative free cash flow doubling to $569 million in the fourth quarter. For 2021 as a whole, this important key figure was down by 159 million. This only corresponds to a benevolent interpretation with the group forecast of an approximately balanced value.
Netflix tries to be calm: boss Hastings points to a long-term change in the media industry – away from the classic TV system towards more flexible Internet streaming. The growth potential is still great, he emphasizes. He promises a positive free cash flow from next year.
The global success of the South Korean series “Squid Game” confirms the business model: the thriller captivated viewers for 1.65 billion hours in the first four weeks alone. The series was discussed on social media, which means free advertising for Netflix. The success of “Squid Game” shows that you can’t just be successful with bombastic US productions and Hollywood stars like Jennifer Lawrence and Leonardo DiCaprio, the main actors of the doomsday satire “Don’t Look Up”.
The assessment of the situation is made more difficult by the pandemic, which is also severely distorting business development at Netflix: In the first phase of the COVID crisis, millions of people hid at home. Netflix, with its huge library of movies and series, helped fight boredom. In the first quarter of 2020 alone, subscribers grew by 15.8 million, more than twice as fast as expected. In the second quarter, Netflix was well above its target with 10.1 million. Normalization after the Corona boom should therefore not come as a surprise to anyone.
new markets
Currency effects play an underestimated secondary role in the consolidated balance sheet. Since most of the costs are incurred in dollars, but meanwhile 60 percent of sales are generated in international markets, the recently strengthened US currency is depressing earnings: The group, which relies on currency hedging, calculates that sales will cost around one billion dollars in the new year deliberately omitted. The international market is likely to gain in importance in the future, and the streaming portal has significant potential, especially in Asia.
The currently disappointing figures from the Netflix headquarters come at an extremely bad time: Brsians are extremely nervous about the upcoming interest rate hike by the American central bank. Growth stocks in particular are under close scrutiny. The crash in Netflix shares is extreme even in this environment: after the quarterly figures were published, the price plummeted by 22 percent in just one day. After the record high in November, the minus increased to 50 percent. Around $155 billion in market value was lost, at least for the time being.
A positive side effect of the crash: the ratings have also fallen significantly. Based on the company profits expected by analysts for the current year, the price-earnings ratio is just over 30. If the group meets expectations in the operating business, this indicator would shrink to around 22 by 2024. Netflix is currently valued lower than it has been in over a decade.
Drama: Technically, the situation is still tense, fundamentally, the price drop offers an entry opportunity.
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