Netflix Stock: Former Pack Leader Left Behind (NASDAQ:NFLX)

Earnings Season

Netflix’s (NASDAQ:NFLX) highly anticipated Q2 earnings results were released after the bell Tuesday, surprising many investors and providing bulls at least a brief reprieve from their year of anguish (a strong word choice, but how else to describe NFLX’s Year-To-Date 65%+ plummet?). Perhaps this could be the start of a mid-year turnaround for the stock with its 8% after hours jump… maybe, but Netflix isn’t the same “pioneer” that it used to be. They are certainly still a market leader, but with the increased competition on every front from content to price, what are Netflix’s – and, to a larger extent, the entire streaming industry’s – future prospects?

Netflix’s quarterly announcement seemed to be the news of the day, with every business-oriented show discussing the report. Netflix managed to beat on the bottom line with a $3.20 GAAP EPS (vs. $2.94 EST) while only missing on revenue estimates by a meager $60M ($7.97B vs. $7.98B), with revenue increasing 8.6% Y/Y – far from negative on the top line! Before diving deeper into the financials, there is one other essential factor: foreign currency exchange. Netflix’s results were “worse-than-expected” and were impacted by a stronger dollar – top line growth would have been closer to 13% on a constant currency basis – almost 50% more than reported growth! So essentially, negating fluctuations in currency, Netflix beat on both the top and bottom lines. Is it time that we all get in near this multi-year lows?

I have to admit it, actually. I’ve been a long-term Netflix bull, first acquiring shares over ten years ago in early 2012. Sadly, I sold way too soon, but I have always been fascinated by the streaming industry and media content at-large. Interestingly, the first Seeking Alpha exclusive article that I ever wrote (back in 2013) was about Coinstar (prev. Outerwall) and their multiple ventures, including the Redbox Instant streaming partnership with Verizon (VZ). Over the years I have focused on and written about several other media plays, including Sony’s (SONY) incredible content library, YouTube (GOOG) (GOOGL) and Sports, and Fox (FOX) and their airing of the World Cup. Every single one of those articles was bullish. However, every single one of those articles were written at least 8 years ago to the month, and a lot has changed in the streaming landscape.

Content Has And Will Always Be King

It is certainly cliche to say that content is king, but it is – and will always be. There are more available streaming services to consumers now, and naturally each service has its own targeted audience. In the VOD (Video On-Demand) streaming market, services can be extremely targeted… Golf? Tennis? Horror films? Comedy? Yes, there are streaming services for individual sports and genres, so how do you even choose?

I honestly do not think that this is part of the problem – I think that this is the problem! There is no one streaming service that does it all, so how do we choose which one(s) to subscribe to? Content is king, but there is only so much that one can consume (ignoring whether that person is actually interested in and engaged while consuming it). The key to content is the ability to subscribe to services that feature a library focusing on one’s interests. This is what really makes streaming — and each individual streaming service — stand out versus subscribing to (and paying for) broader ‘packages’ with cable. Even when Netflix first started as a DVD delivery business — before they developed their prominent streaming platform — they embodied this idea. You could pick and choose what you wanted to watch. Instead of paying for everything, you simply paid for a certain number of DVD rentals at a given time, and could watch and return those before getting access to more of what you wanted. Choice is key.

Now, everything that is on a particular streaming service is there – it is available immediately at the press of a button (excluding some add-on purchases/upgrades like additional channels or packages). So naturally, the service has to either pay less for or offer less content in order to avoid running their business into insolvency. Services can limit spending on their library through several measures, though the primary differentiator is Original Content. While there is price variance between streaming services, the largest difference between them is their content – so the content creators, in my opinion, are the greatest beneficiaries of this streaming boom. They can license their content to multiple companies, do a more expensive exclusive license, or even create their own service (as many like Disney (DIS), AMC (AMCX), and Fox News (FOX) have). Either way, there are a plethora of existing content producers that would love to showcase their media to consumers, and they are in the driver’s seat!

This is part of the reason why I believe that original and exclusive content is an essential component in any streaming service’s success — they are the (content) differentiator. This proved to be the case for Netflix’s Q2 earnings beat. Co-CEO Reed Hasting, when asked to give an explanation for Netflix’s positive quarter, stated: “‘If there was a single thing, we might say Stranger Things. We’re executing really well on the content side.’” This shows the power of one original ‘hit’ show, but how can we predict which service is (and will be) the best at developing these ‘hits’?

The Hit Factor

Netflix has become incredibly good at developing these ‘hits’ at a higher than expected rate. A bunch come to mind including: The Handsmade’s Tale, Squid Games, Inventing Anna, 13 Reasons Why, Ozark, Money Heist… just to name a few. But what makes a ‘hit’ so special? The true metric that we care about is how much Netflix is spending on content per subscriber (for a given period of time, let’s say a month), and we can estimate how much an average subscriber streams in a month (in minutes) – that gives us the total average minutes watched (per subscriber per month). We can assume that, on average, a person’s streaming habits, while they differ greatly person-to-person, remain largely the same over time (minutes watched per month). There is, of course, going to be some variance, for instance if one has more time off or there is a new show that they are really into, for example; but we will assume, for the purposes of this article, that it remains largely the same over time (this could be an entirely different article).

Now if there is a huge ‘hit’ that streams on Netflix, the money to create and develop the show has already been spent. So, the more minutes that are watched, the cost to develop the show (the content spend) per minute watched comes down, and since (we assume that) each person streams a set amount of minutes, not only do the costs come down but satisfaction also goes up with these shows. There is usually more than one show or movie that a person would be satisfied streaming, so there are many ways for a streaming company to fulfill that person’s content consumption, but there are likely many shows from other services that would also satisfy them.

Each individual streaming company is trying to balance their own viewership and cost metrics (to ensure profitability) while simultaneously competing with other services to attract and retain users (revenues). Netflix is not the only platform generating these ‘hits’ and attracting large viewership totals, there is a lot on the line. The SVOD (Streaming Video On-Demand) market, while already affecting consumers and content creators, is only expected to continue to grow and increase its disruption, with estimates projecting the market to be valued at nearly $150B in 2026 from less than $40B in 2019, and nearly $1T by the end of the decade.

Attracting subscribers is essential for every single service, and there is clearly a large and growing market at stake. Approximately “86% of US Households subscrib[e] to an SVOD (Streaming Video-On-Demand) service… 110.2M US Households as of March 2022.” But there are differences between some of these services that affect their appeal to consumers. These services can be segmented by their business models (and revenue sources). According to Kantar’s ‘Entertainment on Demand’ report: SVOD (paid streaming without ads) is down .2% points to 81.4% household penetration, while AVOD (paid ad-supported streaming) grew by 2.2% points to 20.2% household penetration. On the other hand, FAST (free, ad-supported streaming) grew by .9% points to 25.3%. The recent news reporting that Netflix has lost subscribers is not actually that surprising – it’s a broader market trend. And while both the AVOD and FAST segments grew their household penetration, their growth rate – along with that of pay-TV (staying at 60% US Household penetration) – has slowed. There seems to be a crucial trend developing… consumers are becoming more price conscious and are going shifting free and/or cheaper streaming options – or at the very least cutting some of their existing subscriptions.

Evaluation Of The Pack

I use the word “pack” quite literally here – like a can of sardines. There are a plethora of competitors in the industry, with few if any differences between some of them. It is hard to accurately assess consumers’ preferences due to the number of both known and unknown options, as well as the necessary sample size. So how could and should one rank and decide between the many available streaming services? Well, I just ‘googled’ the top streaming services, and found many available rankings, insights, and feedback published to assist people in the challenging decision of choosing their streaming service subscription(s). It’s still not an easy choice, as no one service has everything, but, below I compiled four of the top rankings:

SELECTED STREAMING SERVICE RANKINGS

*Funimation is now merged with Crunchyroll, and owned by Sony

^Funimation, Hulu, HBO Max and Peacock are in a four-way tie for fourth

Looking at a random selection of rankings and their ratings of streaming services – populated from the first 15 results of a Google search – there seem to be several interesting takeaways. The top-ranked services are Netflix (1.5 avg. ranking), Hulu (2.75 avg. ranking), and HBO Max (3.5 avg. ranking) across all four listings. Surprisingly, after these three there is no other service that appears in the top five of all of the four random lists compiled above.

Prime Video (3 avg. ranking), has a higher avg. ranking than HBO Max, but this is only across three of the rankings as it does not appear in the top five of the fourth. This makes it hard to compare apples to apples, though once adjusting for the fact that it did not even make the top five on one of the four lists, it certainly is not in the upper echelon of Netflix, Hulu and HBO Max; the highest HBO Max could avg. across the selected rankings is 3.75 (and it is likely lower than this). If it appeared eighth in Tom’s Guide’s rankings instead of (the best possible scenario) sixth – which I assumed in the 3.75 calculation – its new avg. ranking would be 4.25, certainly excluding it from the top tier.

Peacock cracked the top five on just two of the lists (4 avg. ranking on those lists), with Disney+ (3.5), Funimation (4) and SlingTV (5) each on just a single list. While it is difficult to account for the fact that most services did not make all of the lists (meaning we know that they weren’t in the top five of those lists, but we don’t know what their position actually is), there is a definitive top 3: Netflix, Hulu, and HBO Max – in that order. As being excluded from the top strata of a list is certainly a negative indication of a service’s ranking, I would say that the remaining order – based on each services avg. on the lists they appear on, as well as how many of the four selected lists they make an appearance on – is: Prime (because it appears on 3 lists, and averaged 3rd on those lists), Peacock, Disney+, Funimation, and then SlingTV (of the aforementioned services).

While these rankings are insightful, they are from individual writers – not a survey or collected data. Approaching this from a different angle, I looked at Real Good’s viewership data published in Mashable weekly articles:

Top 10 Streamed Movies and Shows x Week	May 14*	May 21*	June 11*
1.	Moon Knight	Star Trek	Obi-Wan Kanobi
2.	Outer Range	The Lincoln Lawyer	Stranger Things
3.	Star Trek	Candy	The Boys
4.	The Staircase	The Staircase	The Lincoln Lawyer
5.	Under the Banner of Heaven	Outer Range	The Orville
6.	Bosch: Legacy	Hacks	Barry
7.	Ozark	Better Call Saul	Under the Banner of Heaven
8.	Candy	The Essex Serpent	Night Sky
9.	Better Call Saul	Under the Banner of Heaven	Hacks
10.	The Pentaverate	The Wilds	Better Call Saul

Now, a different view:

Week x Top 10 Streamed Shows	May 14	May 21	June 11
1.	Disney+	Paramount	Disney+
2.	Prime	Netflix	Netflix
3.	Paramount	Hulu	Prime
4.	HBO Max	HBO Max	Netflix
5.	Disney+ 1	Prime	Hulu
6.	Prime 2	HBO Max	HBO
7.	Netflix	AMC+ and Netflix	Hulu
8.	Hulu	Apple TV	Prime
9.	AMC+ and Netflix	Disney 1	HBO Max
10.	Netflix	Prime	AMC+ and Netflix

1 Began streaming through FX on Hulu; FX is owned by Disney

2 Through Amazon Prime’s free to stream service FreeVee

While not an ideal proxy, consumer satisfaction (measured through viewership totals) has one clear takeaway: Netflix is still king of content – for now. They are the only service to have 3 programs in the top ten for two of the weeks outlined above – no other service even has one! But their advantage is certainly not a moat, with HBO Max having 2 programs in the top ten across two of the weeks; and, Hulu, Prime, Disney+ also each reaching two shows on the top ten of Real Good’s ranking once. Additionally, Netflix lacks the live television, sports, and news of many of its competitors – meaning that for many, Netflix cannot be their only content subscription.

It is actually quite clear: Netflix is still king… excluding live television (sports, news, etc.), and there are many others coming for its thrown. While Netflix is essentially the service that started streaming as we know it today, much has changed. Netflix is no longer leading the pack, and instead following others’ ideas (such as by offering an ad-supported subscription beginning in 2023, similar to Hulu (DIS and CMSCA) and others, using their content for video games in the future, etc.). Its future prospects – and thus much of its value – have greatly diminished. Now just one of many in the pack, Netflix’s valuation and future have changed immensely.

Outlook

It’s hard to reread this sentence, but I actually think Netflix’s 2022 YTD plunge is justified. Still, as of the conclusion of after-hours trading on Tuesday evening, Netflix’s market-cap surpassed $96B. While it is only approximately half that of Disney’s and Comcast’s, Netflix does not boast the same core (profitable) businesses and ancillary revenue streams – they are a pure streaming play. While this used to make Netflix an attractive investment, the industry is becoming overly saturated. Netflix is clearly struggling in the fight to attract and retain subscribers, which will only continue to toughen with time. I predict that there will be more original and exclusive content among streaming companies to further differentiate themselves. Netflix lacks the other revenue streams of Disney, Fox, Comcast and others (i.e. television networks get most of their revenue from non-streaming sources) to keep up with the necessary content spend that is required to continue to differentiate themselves. Netflix is no longer the pack leader or even an innovator in the streaming sector – and, in my opinion, is not worthy of an investment at this time.