Tempted to buy Netflix after the collapse of the company’s stock to a four-year low? Don’t be.
The heady days of growth for the media streamer’s business and shares appear to be over.
Stay subscribed or sign up for Netflix’s content, sure, but consider the well-informed comments by technology expert Ben Thomson, Publisher of Stratechery, on why Netflix’s strategy seems unusually haphazard and desperate, before thinking about buying the stock.
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| Netflix on Tuesday reported a loss of 200,000 subscribers during the first quarter — its first decline in paid users in more than a decade — and warned of deepening trouble ahead.
The last time Netflix lost subscribers was October 2011.
Netflix previously told shareholders it expected to add 2.5 million net subscribers during the first quarter. During the same period a year ago, Netflix added 3.98 million paid users. |
On one hand, these earnings are bad (although it’s worth noting that Netflix would have grown by 500,000 subscribers had they not pulled out of Russia).
On the other hand, I actually think they are worse than they appear!
First off, Netflix basically confirmed my thesis that COVID delayed an inevitable reckoning in terms of saturation and increased competition.
Questions about account sharing and increased competition aren’t new; what is new is Netflix admitting they are factors.
To that end, I appreciated the honesty in this letter and interview — Netflix executives made clear that they viewed the situation as a crisis akin to other major challenges in the company’s past — but it is very fair to be critical of the cavalier way in which Netflix dismissed these looming concerns previously.
More sustainable growth is found in Netflix’s usual drivers: increased subscribers, and increased prices.
This is where these results were particularly concerning.
First, Netflix’s subscriber numbers decreased almost everywhere:
This was a surprise to me; I’ve been writing about how Netflix had saturated UCAN for many quarters now, but I wasn’t expecting declines in multiple geographies.
Secondly, the primary driver of the miss in projections was churn (subscribers unsubscribing).
What is particularly concerning, though, is that this churn increase happened the same quarter that Netflix implemented a price increase.
Netflix executives went out of their way to argue that price-related churn was in-line with their expectations, but it is difficult to accept that argument given that those same executives just underestimated churn to the tune of 2 million net subscriber..
This, by extension, casts doubt on Netflix’s long-term ability to raise prices.
Yes, the most recent price raise was still revenue accretive — $2 on millions of subscribers quickly outweighs some amount of churn — but what made these earnings so concerning is that there are now serious questions about both of Netflix’s obvious growth drivers in a way that extends far beyond assumptions about UCAN saturation.
Netflix to Explore Advertising
Look, I obviously want to crow about this point given that I just argued that Netflix should sell advertising two weeks ago.
My desire to toot my own horn, though, is tempered by a couple of things:
- First, like I said above, these earnings were quite a bit worse than I, a long-term Netflix bull who has also been predicting a difficult few years for the company, expected. That calls for a bit of humility.
- Second, the haphazard way that Hastings announced this initiative feels like this is a bit of a last minute decision that was thrown into the earnings interview in the desperate hope that it would arrest Netflix’s stock plunge.
- Third, the idea that Netflix would simply outsource ad sales is not only a mismatch with the Netflix brand, which still retains some vestiges of being premium, but is also contrary to the way that the ad market is evolving.
If Netflix is going to offer ads, the company ought to do it right: that means building up its own targeting and sales infrastructure that takes advantage of the information it has about its users, and which avoids the need to interact with 3rd parties.
Indeed, this route seems so clear to me that I wouldn’t be surprised that Netflix ends up here.
That, though, only reinforces the idea that this was a very recent decision and a last minute throw-in to these earnings, and that, more than anything else, makes me feel like things are even worse than they appear.
Netflix is a company that always feels in control, and that simply wasn’t the feeling I took away from the earnings interview.
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Disclosure: DRL, the sponsor of USI, is invested in a streaming service that is a competitor of Netflix.
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