For the last several years, securities analysts have come up with an acronym that covers what they considered to be companies that were long term growth stocks which, barring minor dips, would be superb long-term holdings.
The term that was coined was FAANG which stood for the following blue chip high growth companies:
Facebook (now Meta)
Amazon
Apple
Netflix
Google (now Alphabet)
Recent events may made me question, as a media analyst, whether Netflix still belongs as a member of that exclusive club.
How can this be? You may remind me that a couple of years ago in MR I stated plainly that Netflix had won the race in streaming video (See Media Realism, 2/11/19, Can Any Competitor Catch Netflix?) Well, a beauty of markets, particularly those that are relatively free, is that they are always changing.
Netflix is beginning to face some serious competition from Amazon, Apple TV, and Disney +. Millions are beginning to customize their video needs and, with their recent price increase, some may not include Netflix in their future plans.
Face it. Virtually all streaming services received a positive boost from the hellish lifestyle environment that COVID 19 gave us. Being more housebound, we watched more video and shared more favorite video ideas with friends and family. As COVID wans (we all hope), that tailwind will erode. Keep in mind that by the end of 2021, Disney + had already shattered their pre-Covid projections for subscriptions in 2025!
So, all services could see a slowdown in growth. Netflix received some raised eyebrows when their 8.3 million subscriber growth in 4th quarter, 2021 was below the 8.5 million generated in the same quarter of the previous year. Still growing, for sure, but not at a FAANG type juggernaut pace. Streaming will likely take up a smaller percentage of people’s time, once we are free to socialize and travel as we did in the pre-Covid era.
Inflation is now at the highest levels in the US in 40 years. Money is going to get tight for many people. Do you really need to pay $15.47 per month for standalone Netflix? People may become more selective on their streaming options and Netflix could lose a few steps.
All streaming services suffer from “churn”. Customers order for a few months to see a specific series or two and then promptly cancel. This might hurt Netflix more than others as they do not have a balance sheet as strong as their competitors.
Consider both Apple and Amazon. Apple had as much as $248 billion on their balance sheet a couple of years ago. They could lose a billion plus per year on Apple TV forever and it would not impact the company much at all. Or, how about Amazon? Their programming is getting deeper and the transmission issues of a few years ago are gone. Another sleeper with Amazon is that some minor research studies showed that many Amazon Prime subscribers did not realize that Amazon Prime Video came with their Prime subscription.
Anecdotally, I found this to be true. I vividly remember telling a group how much I enjoyed a certain offering on Amazon Prime Video. An earnest young lad lamented that he did not have the service. “Of course, you do, a friend chimed in. It comes as part of your Amazon Prime sub.” He smiled and said, “Wow, I get it for free.” It was my turn to smile. I wanted to tell him that only sunshine and air are free in this life, but I stressed the Prime Video was baked into the cost of his subscription. So, Amazon is getting more users as Amazon Prime grows and more people around the world use the delivery service.
Each year, Netflix spends a fortune on developing programming. It has run as high as $12 billion. That is a lot for any firm to handle but, keep in mind that Netflix is a one trick pony. They did not make a profit for years and many assumed that they would be another Amazon who merely plowed all revenue back into development but eventually turned the corner and profits soared. Well, Netflix is not Amazon.
Disney is perhaps the greatest entertainment company in history with a film library of their own work going back to the 1930’s plus ownership of ESPN, ABC, theme parks and seven movie studios. Netflix does not have nearly as many revenue sources as major competition.
Okay, so am I saying that Netflix is going to dry up and blow away soon? Of course not! One option might be to accept advertising. I fully realize that such a course of action sounds as if it is heresy for a firm that has been advertising free. Yet, millions might allow advertising within limits if the monthly subscription cost drop sharply (maybe 40% of current cost).
Also, moving into other venues such as news items or foreign sports might work as they are now in most countries across the globe.
My favorite media analyst, Laura Martin of Needham has discussed how the share price of Netflix has taken a big haircut from $700 to around $395 as I type. The price to earnings ratio has dropped as has its growth multiple to the entire market. She now says that “Netflix is not a growth stock anymore but a media stock.” That is a statement that this old media analyst can relate to very easily. So, perhaps the day is coming soon when the N in FAANG should be eliminated or replaced.
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
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