Every time we write about Netflix’s woes, the company’s fans are quick to come to its defence.
Fair enough – we all like to kick back and chill, but the voices of dissent grow stronger.
Many industry experts have already penned dramatic headlines, like ‘Netflix needs a miracle to survive‘, and it appears those concerns are only gathering steam.
This time it’s David Trainer putting the boot in. He points out that the company’s stock dropped 15% off the back of its second-quarter results, says that “it’s hard to ignore all the red flags in Netflix’s fundamentals and valuation”, and claims the company is in “the Danger Zone”.
Let’s move on to each of the reasons he lists.
Content Spending Not Adding Enough Subscribers
Netflix’s biggest problem is that it’s paying more and more to acquire new subscribers. Marketing and streaming content spending has risen from $308/new subscriber in 2012 to $581/new subscriber TTM . Meanwhile, revenue and subscriber growth is slowing….
Rising customer acquisition costs make it hard to see how the company reverses its trend of negative free cash flow.
Still Reliant on Licensed Content – Which It Is Losing
Despite Netflix’s heavy spending on original content, shows and movies licensed from 3rd party studios continue to drive the majority of the company’s viewing hours. Netflix does not release its own viewing data, but numbers from analytics company 7Park Data suggest that, as of last fall, licensed content accounted for 63% of viewing hours on the platform.
That same data also showed that The Office and Friends are two of the three top-streamed shows on Netflix…. [and] Netflix doesn’t appear to have a plan in place to replace these beloved shows when they depart the service in 2020 and 2021.
On the plus side, maybe it will force those rewatching Friends for the eighth time to rethink their lives.
Benioff & Weiss Deal Reeks of Desperation
Netflix’s latest strategy to spend big bucks (and burn more cash) to sign up big name writers and producers to create original content for the platform is risky. Most recently, the company signed up Game of Thrones showrunners David Benioff and D.B. Weiss to a reported $200 million deal.
Speaking to CNBC, New Constructs CEO David Trainer said this deal “reeks of desperation.”
Pricing Power Evaporating
Pricing power has long been one of the major bull cases for the stock. By this argument, the company is keeping its price low now to attract new customers, but the service is sticky enough that they’ll be able to raise prices in the future.
This bull case doesn’t stand up to scrutiny. Streaming services actually face relatively high churn, with 18% of streaming subscribers dropping their service each year. After its recent price increase, Netflix actually saw its U.S. subscriber base decline slightly in the most recent quarter.
Competition Ramping Up
To the extent that Netflix has been able to sustain price increases in the past, it was due to the company’s first-mover advantage. Now, Netflix faces competition from Amazon Prime Video, HBO Now, and Hulu, and the competition is only going to get more intense. Disney, NBCUniversal (CMCSA), and Time Warner (T) are all launching their own streaming services in the next two years.
Netflix Is More Like A Traditional TV Network Now
The combination of all the above points – increased competition, lack of pricing power, and loss of licensed content – leads to a simple conclusion. Netflix is no longer a revolutionary tech platform, it’s just another TV network…
However, Netflix’s valuation does not resemble a TV network. The company has an enterprise value of $150 billion, about 5x the value of the largest standalone TV network we cover, CBS (CBS). Some people might scoff at the comparison of these two companies, but they earned about the same amount of revenue last year ($15 billion), and CBS generated $1.7 billion in free cash flow to Netflix’s -$4.5 billion.
You might think we’re close to done, but there are still a number of further reasons listed, including Netflix’s overreliance on credit, unrealistic valuation, and no looming acquisition buyout.
If you want to read the rest of the Forbes article, head here.
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