In the space of six months, the stock market valuation of the streaming giant has been divided by 4, attracting today many investors who see it as an ideal entry point. Netflix’s woes kicked off a broad correction across the tech sector.
But the market finally seems to be coming to its senses, after valuing the group on fanciful projections. Netflix has now entered a new phase of maturity which will involve a focus on monetization rather than growth. This natural step is a real “test” for all the streaming and SaaS sectors, which will have to prove the viability of their business model.
Fierce competition
We are already seeing that the subscription model is less resilient than expected, as soon as the competition shows its teeth. Streaming illustrates this reality well. Disney achieves perfect execution in ramping up its platform disney+. Thanks to its inimitable catalog, it prevails over the family sector.
On the other hand, Netflix is overwhelmed by Discovery Time Warner’s offering, which includes the HBO Max catalog, on adult entertainment. The arrival of Paramount, the result of the combination CBS and Viacom, adds an additional challenge. And of course, Amazon Prime is always present in the background.
Because even if Netflix has a superb brand, it does not guarantee success in streaming. Just look at the failure of Apple’s platform, which never managed to take off. Another example is Discovery, which before its merger with TimeWarner, stagnated at low valuation levels for almost a decade, despite real and proven earnings power. Yet another example: Disney+, which enjoyed a perfect launch and recorded 8 million new subscribers in the last quarter. Yet the service continues to operate in the red.
The question of profitability
In this new highly competitive landscape, Netflix’s offer is all in all the least readable. Indeed, for investors interested in the streaming sector, the competition is not lacking in attraction: Disney is positioned as number one on families and has a major competitive advantage, thanks to a plethoric and already constituted catalog. Similarly, Discovery TimeWarner quotes at 7 times its profits, despite a very high debt. It must be said that it not only has a gigantic catalog, but also the recent entry of Berkshire Hathaway into the capital of Paramount.
Some observers rightly point out that Netflix’s structural problem is its inability to generate profits, as all cash flow must be reinvested in the production of new content if the platform is to retain its subscribers. Because they consume the series very quickly, in “binge” mode, and will go see the competition if they can’t find any new content to eat. Netflix must therefore constantly renew its stock of productions and deliver “hits”, which of course is never guaranteed. However, production costs are constantly increasing, and with them the financial risk.
In addition, the streaming giant’s accounts are generally unreadable, even by a seasoned analyst: it is therefore impossible to project a normalized earnings capacity or a remotely reliable financial model. The recent “return to sanity” in the markets should prompt Netflix to get its house in order. Obviously the process has already begun, with redundancies and a repositioning of the offer.
Let’s not get carried away too fast
Despite the spectacular drop in its capitalization, we are still talking about an enterprise value of $95 billion for a turnover of $30 billion, i.e. three times the income without a demonstrated ability to generate profits: conservative investors will pass their turn …
It must however be recognized that there are multiple actionable levers to boost profitability: increase in the price of the subscription, advertising and hunting for shared accounts.
The Californian giant has 222 million paying members in more than 190 countries and an extensive catalog of unlimited television series, films, documentaries, and video games. But the quality of this library is still far from equaling that of the main competitors and It will still take decades of successful investments to match them…
Netflix therefore remains a tempting investment, but it is better to keep a cool head, because the file is still speculative.