by Tim Schäfer, Euro on Sunday
Streaming pioneer Netflix looks back on golden years. But with numerous new competitors, times became rougher. The film, which was last shown on Wall Street, was a horror shocker: Netflix is one of the worst stocks in the US S & P 500 index over a twelve-month period. The stock collapsed from its peak price of $700 75 percent.
Netflix is in trouble. Founder and boss Reed Hastings has borrowed more than nine billion dollars and put the money into new films to keep customers happy. There are now over 2,200 TV series and 4,000 films on the platform. However, the cost of high-quality movies has skyrocketed as streaming channels compete fiercely.
Not only that. In its quarterly announcement in mid-April, Hastings admitted that it missed its own growth forecast. The number of subscribers fell slightly by 200,000 to 222 million in the first quarter. For the first time in a decade, the customer base shrank. For the second quarter, Hastings and his co-boss Ted Sarandos expect two million customers to be lost. The reasons are varied: Netflix said goodbye to Russia after Putin’s war. The home market in North America is saturated.
At the height of the pandemic, Netflix has made life at home more comfortable. With the corona easing and inflation, more customers are canceling their subscriptions. Netflix will get through the difficult times, the boss recently promised – despite the increasing competition. It’s getting more and more numerous. In addition to Amazon Prime Video and Apple TV+, the smaller providers Paramount+ and Peacock are catching up.
Disney’s Triumph
Aggressive attacker Disney+ added 7.9 million subscribers in the first quarter alone, well above expectations. Now there are 137.7 million, around a third more than in the previous year. There might be more to come. Disney is currently rolling up 40 countries in North Africa, the Middle East and Europe. According to data from the US analysis company JustWatch, Disney+ is now the global number 3 in the industry. The growth should continue, according to estimates, by 2024 Disney+ could have between 230 and 260 million subscriptions.
Amazon Prime Video, which has been available for free with free shipping since 2005 for all Prime customers of the online department store, has more than 200 million customers in 19 countries. Amazon strengthened its streaming with the takeover of the film studio MGM for 8.5 billion dollars, the authorities gave the green light for the deal in March. MGM, with its 4,000 films, is known for hit films such as “Rocky” and “James Bond”.
Hastings, however, is considered an old fox who always has an answer ready. So far, the streaming inventor had categorically rejected commercial breaks. Now he is planning a radical departure from his previous strategy. Hastings plans to add advertising to affordable subscriptions before the end of the year.
The temptation is great: according to industry consultant Digital TV Research, the advertising market already had a volume of 37 billion dollars in 2021. By 2027, the business is expected to grow to $70 billion. The whole industry is extremely attractive to advertisers. Because Netflix and the streaming competition can use advertising in a much more targeted manner than the linear broadcasters because they know their customers and their viewing habits much better. Competitor Amazon Prime Video has also recently started using advertising. Competitor Disney + wants to make advertising breaks for a maximum of four minutes per hour from 2023.
In addition, Netflix offers free games on the platform to increase the attractiveness of the subscription. Hastings is also cleaning up old construction sites. According to the company, about 100 million paying customers share their passwords with others. The group wants to prevent this in the future. And: Hard savings are made – and work is done to reduce the mountain of debt. In the first quarter, Hastings paid off more than $700 million in debt.
The Netflix boss is targeting positive free cash flow to keep the rating agencies happy. The rating house Moody’s classified Netflix’s creditworthiness as “junk”. S&P upgraded the stock to investment grade last year. The streaming pioneer will probably remain volatile here, in turn, speculates Moody’s.
Nevertheless, the agency points out that the Netflix board wants to be disciplined with the money from now on. The company no longer intends to buy back shares to conserve cash. Hastings also cut about 150 jobs in the past week. “Our slowing revenue growth means we also need to slow our cost growth as a company,” the streaming giant said in a statement. Of course, only two percent of the workforce is affected.
Chief Financial Officer Spencer Neumann explained in April that Netflix plans to reduce some of its spending over the next two years: “We’re trying to be smart and prudent about cutting back some of that spending growth to reflect the realities of the company’s revenue growth to reflect.” The New York Times reported that there will be more job cuts later in the year, according to a company insider.
Nevertheless, Netflix wants to continue to spend 17 billion dollars a year on new series and films. Because what also causes problems for the group in the home market are the many new rivals. Cable giant Comcast, for example, entered the market fairly late with its NBCUniversal subsidiary Peacock. The service started in July 2020. At the end of March, Peacock had 28 million active monthly users, of which 13 million were paying customers. Peacock has a free ad-supported service and a paid ad-free service. The live broadcast of the super bowl the Football Pro League and the Beijing Olympics.
Small players attack
Media giant Discovery has teamed up with WarnerMedia, the film studio behind Game of Thrones and Succession. The empire has been trading as Warner Bros. Discovery on the Nasdaq since April. Another attacker is Paramount Global, formerly ViacomCBS, with Paramount+. Banks attempted to merge Paramount+ into Peacock in January, but Paramount Global management refused. However, both companies already operate joint streaming in Europe. Paramount+ expanded its subscription base by 6.8 million to 40 million in the first quarter.
The stock market scales currently show only $ 80 billion at Netflix. At this level, analysts even consider the group to be a takeover candidate. The speculation: Apple wants to expand its streaming and could start talks. Apple TV Plus has an estimated 25 million paying subscribers worldwide. In addition, there are around 50 million free subscriptions that get access for a year through the purchase of Apple hardware. Corporations like Disney or Amazon could also put out feelers. However, it is uncertain whether the US antitrust authorities would even let such a major deal go through.
INVESTOR INFO
In the good times, the world market leader and video streaming pioneer got into too much debt to always have an attractive film library. It’s paying off now. Debt is now becoming a threat as subscription numbers dwindle. The board is working on it and paying off. And cuts costs. The earnings multiple of the share is now moderate. Since 2002, the course – including the most recent collapse – has risen by around 16,000 percent. Brave people collect the papers after the crash.
The two media groups Warner Bros. and Discovery merged in April. The associated film studio WarnerMedia, which celebrated its 99th anniversary, has film icons such as “Harry Potter” and “Batman” in the archive. Pay channel HBO is another gem. Discovery added many TV brands through the merger, such as Oprah Winfrey’s channel OWN. The board wants to save three billion dollars a year, but the figures are still mixed. Keep.
The New York media group, which emerged from the merger of Viacom with CBS, has other streaming services such as Pluto TV and Showtime in its portfolio in addition to Paramount+. Paramount+ is a small player, which is one of the reasons why the stock is listed around ten percent below book value. The debt is high at $13 billion. Warren Buffett’s holding company Berkshire Hathaway recently acquired a $2.6 billion stake. The profit multiple is low and the dividend is attractive.
Notice of Conflicts of Interest:
The author holds direct positions on the following financial instruments mentioned in the publication or related derivatives that can benefit from any price development resulting from the publication: Netflix.
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