What I read yesterday

19/09/2024

What I read yesterday

Netflix (NFLX).

We first wrote a note on Netflix on 28 April 2024 which can be seen here. This was followed up by a note on July 26 which can be found here. 

The latter concluded by noting the analysis- “ leads to a fair value of the stock using of $ 775 per share which is 19.8% above the share price today.”   At that time the share price was ~$ 630 per share.  Today, the share is trading at $690 and we have a 2.5% holding in the stock.   

The Financial Times had a long detailed article on NFLX entitled  “How Netflix won the streaming wars.”

The sub-headline was “The company has staged a remarkable recovery since the ‘great correction’ of 2022 and now has the edge over Hollywood rivals.”

We quote some sections of the article which can be found here.

Netflix’s leadership team looked shaken. The blistering 10-year growth streak that had made it a Wall Street darling came to an abrupt end in the spring of 2022 with the revelation that it was losing hundreds of thousands of subscribers. The streaming wars were at fever pitch, with Disney+ and other services launched by the established Hollywood studios all gunning for Netflix.

 Speaking to stunned investors on a video call on April 19 2022 Netflix co-founder Reed Hastings began rattling off initiatives to reverse the slide. Netflix would start cracking down on customers who shared their passwords with friends or relatives, an idea he had opposed in the past. Another proposal that Hastings had long dismissed — advertising — was now on the cards.

The stock plummeted, marking the start of what became known as “the Great Netflix Correction”. But instead of being the comeuppance that many in Hollywood’s old guard had been praying for, it marked the beginning of a strategic shift that has expanded Netflix’s lead over the traditional entertainment companies, which are still struggling to make money in the business after pouring billions into streaming.

 Since launching its password crackdown in May 2023, Netflix has added 45mn paying subscribers. Its share price has risen more than 300 per cent from its post-correction low, recently setting new all-time highs. Such a rebound was hardly assured in 2022. But since then, Netflix has launched an ads business from scratch, invested in its nascent video games division and expanded its live “experiences” around popular shows such as Bridgerton, Squid Game and Stranger Things.

 It has even started dipping into live sport

The Netflix correction marked the end of investor patience for streaming losses, and Disney is the only one of the legacy entertainment groups currently making any money in that business after turning profitable this summer.

 The movie industry is weathering another difficult year, prompting concerns about whether the box office will ever sell as many tickets as it did before the pandemic. Cable television — once a prodigious cash flow generator — is in a deep decline, and many doubt that streaming will ever replace its moneymaking power.

There was scepticism about the password crackdown as Peters began launching controlled tests in markets such as Chile, Costa Rica and Peru in early 2023. Some analysts thought the initiative would end up losing customers for Netflix. Instead, it proved to be a boon that turbocharged Netflix’s growth for more than a year, with total subscribers reaching 238mn in the most recent quarter, up 16 per cent from a year earlier.

Nearly five years after the launch of Disney+ ignited the streaming wars, Netflix remains on top in terms of both subscribers and time spent on the service. In July, it captured about 8.4 per cent of US screen time while its nearest Hollywood rival, Disney, had 4.8 per cent between Disney+ and Hulu. Streamers run by the other Hollywood studios — Warner Bros Discovery’s Max, Comcast’s Peacock and Paramount+ — all had less than 2 per cent of viewing hours.

Yet with the surge from the password-sharing crackdown starting to taper off, analysts are raising questions about the next leg of growth for Netflix.

The company now says that advertising will not be a “primary driver” of revenue growth until 2026.

In Hollywood and on Wall Street, there is an expectation that weaker streamers will either combine or shut down within the next 18 to 24 months.

Yet even if there is a shakeout, there will still be an intense fight for eyeballs in the broader streaming audience.

YouTube is mostly known for its user-generated content but is also pushing paid subscriptions for offerings such as NFL Sunday Ticket, which can cost about $480 per year.

TikTok is allowing its users to experiment with long-form video of up to an hour. And free streaming video sites such as Tubi, a service owned by Fox, are growing quickly on the back of older TV titles.

After the subscriber declines in 2022, Netflix capped its content budget at $17bn, though spending fell to $13bn during the Hollywood strikes last year. The company also discovered that its subscriptions kept growing during the strikes, even without much fresh programming.

“They still had incredibly strong subscriber growth and they were not suffering when it came to their engagement numbers — they were still doing fine while the traditional TV businesses were really struggling,” says Jamie Lumley, an analyst at Third Point, a research firm.

The lesson Netflix took away from the strike experience, Lumley adds, is that it does not have to produce as much new programming as it had been. “That gives them flexibility to take some bigger swings on different kinds of content,” he says. Company officials say they will increase content spending from $17bn in the future, but haven’t given a timeframe.

This is Hallgrímskirkja in Reykjavík, Iceland.   It seem to be modelled on a Normal Statistical distribution  

19/09/2009