Mario Tama
The following segment was excerpted from this fund letter.
Netflix (NFLX)
Netflix has run into real growth challenges. After reporting very strong levels of subscriber additions in recent years and reporting very strong growth as recently as the fourth quarter of 2021, the company has seen incremental subscriber growth slow to a standstill. While you may read media reports about the company “hemorrhaging” subscribers (a phrase seemingly used in many news reports about the company), the fact is that the company reported first quarter subscriber levels were up 8% vs a year ago and they guided to second quarter subscribers being up 5%.
But there is no doubt that something has caused the company’s growth rate to decelerate very quickly, vs. the low double digit growth rate we had been expecting. While some investors believe that Netflix is simply losing subscribers to competitors, those competitors are not seeing the sort of surge in subscribers that would be expected if a significant number of Netflix’s customers or potential customers were switching services. Importantly, the increased competitive intensity in streaming is most prevalent in the US, where HBOMax and other services have seen strong adoption. Yet the main areas of weakness for Netflix has been Latin America and Europe, where intense inflation pressures and the war in Europe are, in our view, the likely culprits of the company’s growth deceleration rather than competition.
With Netflix continuing to dominate viewing time across streamers (in the US, most all of the top 10 streaming TV shows in any given week are almost always Netflix shows according to Nielsen), we simply do not believe that people around the globe have suddenly, and permanently, lost interest in the company’s service. Far more likely in our view, is that the service is more discretionary in Latin America than we believed and European households face their own economic challenges as well as being worried about the war.
But given the unexpected and sharp deceleration in growth, we have reduced our longer-term growth outlook. We have long thought that the US market was mature, but we have expected the other regions to continue to grow with substantial growth coming from Latin America and Asia. While the Asian market has continued to post growth, we recognize that even if the slowdown is due to economic issues and not competition, the company’s long-term growth potential may be less than we previously thought.
That being said, Netflix’s stock now trades at levels that suggest the business is done growing for good. This seems highly unlikely to us. Netflix is not a fad. Streaming TV is not a fad. Netflix is the originator and dominant leader of the global shift to streaming TV. Households around the world are never going to go back to linear cable TV. As more and more households fully cut the cord and watch TV only via streaming, we remain confident that Netflix will form the core of the streaming bundle as the leading global provider of TV content.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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