Netflix, A Meme-Stock Original

I’ve been bearish on Netflix (NFLX) for many years, not because the firm provides a poor service, but because it cannot monetize content as well or sustain investment in content for as long as its competitors. Though the stock has only become more overvalued, my bearish thesis is proving truer by the day. 

With its huge subscriber miss in 1Q21 and weak guidance for subscriber growth, the weaknesses in Netflix’s business model are undeniable. As a growing number of competitors take market share at a rapid rate, it’s clear that Netflix cannot generate anywhere close to the profits implied by the current stock price. Netflix is back in the Danger Zone.

The New Normal: Market Share Losses

Netflix reported just under 4 million new subscribers in 1Q21, well below its previous guidance of 6 million and consensus expectations of 6.3 million. Management guided for just one million subscriber additions in 2Q21, which puts Netflix on the lowest subscriber addition trajectory since 2013, or when Netflix began producing original content.

Netflix can claim, as they did in their 1Q21 earnings press release, that competition didn’t play a large role in the subscriber miss, but market share data for the streaming industry indicates otherwise. According to a report by Ampere Analysis, a media and content analytics firm, Netflix’s share of the U.S. streaming market fell from 29% in 2019 to 20% in 2020. Figure 1 shows Netflix lost a lot of market share and gained a lot of competitors in 2020.

Figure 1: More Competitors and Less Market Share For Netflix

Market Share of Streaming Platforms 2019-2020

Market Share of Streaming Platforms 2019-2020 NEW CONSTRUCTS, LLC AND AMPERE ANALYSIS

I expect Netflix will continue to lose market share as more competitors enter the market and deep-pocketed peers like Disney and Amazon continue to invest heavily in streaming. For reference, Disney+ expects to add ~35-40 million subscribers a year through 2024, while, at its 2021 trajectory (Netflix expects to add just 5 million subscribers in the first half of 2021), Netflix will only add ~10 million subscribers per year through 2024.

The streaming market is now home to at least 14 streaming services with 10+ million subscribers (see Figure 2). Many of these competitors (i.e. Disney, Amazon [AMZN], YouTube [GOOGL], Apple [AAPL], Paramount [VIAC] and Warner Bros.[T]) have profitable businesses that can subsidize lower-cost streaming offerings and permanently reduce Netflix’s subscriber growth potential.

Figure 2: Lots of Competitors in Online Streaming Because Barriers To Entry Are Low

Streaming Competitors In The Market

Streaming Competitors In The Market NEW CONSTRUCTS, LLC

*Represents Amazon Prime members, all of which can use Amazon Prime. Amazon hasn’t officially disclosed Prime Video users.

**Pricing based in Yuan, converted to Dollars

*** Requires subscription to Hulu + Live TV

***Monthly Active Users (MAUs). As a free service, Tubi reports MAUs instead of numbers of subscribers.

Top Line Pressure: Hard to Sell Price Hikes With So Many Low Cost Alternatives

To date, I underestimated Netflix’s ability to raise prices while maintaining subscription growth, because I expected competitors to enter the streaming market sooner. But, now that the competition is here, my thesis is playing out as expected.

As a result, consumers have a growing list of lower-cost alternatives to Netflix and may not be as willing to accept price hikes going forward. Per Figure 3, Netflix already charges more than nearly every other major streaming service. For reference, I use Netflix’s “Standard” plan, as it allows streaming across multiple devices, as do each of its competitors at the monthly rates in Figure 3.

Figure 3: Monthly Price for Streaming Services in the U.S.

Prices Of Streaming Platforms

Prices Of Streaming Platforms NEW CONSTRUCTS, LLC

Competition Hurts the Bottom line Too…

Increased competition hasn’t only hurt subscriber growth, market share, and pricing power, it also raises the costs for the company to produce, license, and market its content.

In recent years, Netflix has had to spend more to secure content creators, such as the $150 million deal for Greys Anatomy creator Shonda Rhimes in 2017 and the $300 million deal for Game of Thrones creators David Benioff and D.B. Weiss in 2019, to long-term contracts.

Netflix’s is paying more than ever to acquire subscribers. Marketing costs and streaming content spending has risen from $308/new subscriber in 2012 to $565/new subscriber over the trailing-twelve months (TTM).                                                

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Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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