Well, let's go ahead and Jump Right In Netflix is down 25%.
Plus after hours, they release their earnings, just a few
minutes ago, I took the look at the earnings.
I looked at them ahead of time, and I think this sell-off is
kind of deserved. This report was disastrous the
last time that they sold off. I didn't really think that.
In fact, I thought it was a little bit overblown, we can
look at Netflix has a unique stock for me because it holds
two consecutive records of the biggest sell off after biggest
sell off. After earnings, this company
just drops Like a Rock after earnings.
The first time was right here, it dropped 20% in one day and
then it trade down to 30% within just a couple of days, then we
had Bill Ackman, buy into it, the stock traded up a little
bit, got some relief and then it started to trade downwards.
Now they release this disastrous earnings report that will jump
into and they're down another 25% 2260.
So what we're looking at here, just to put this in perspective,
is what happens when a A growth stock, a Growth Company stops.
Growing investors are pricing the company for growth.
That's what you're paying for your buying, the company now
assuming it's going to continue to grow at a certain rate or at
least within a certain you know, probability distribution.
You think it's going to grow this way and then it goes, nope,
we're done growing. We're not growing anymore.
In fact we're doing the opposite of growing that is what's
happening with Netflix. The company is now turning from
a growth story into a non growth story and it's Price low enough
to be a value story. So this stock really doesn't
know where it's in and I think that this sell-off actually
makes sense in this situation. This is one bad earnings report
and I haven't listened to the call with Reed Hastings and Ted
Serranos, but they have a lot of explaining to do.
So let's go ahead and jump right into the investment shareholder.
Letter, released from Netflix, all outline the big, the biggest
things that are positive. The few things that are positive
and the really bad things in this report because there's a
couple key things that I think are art disastrous.
We bad. So we'll get to a fellow
shareholders. Our Revenue growth has slowed
considerably, that's the first line in.
This is how their revenue growth is slowing and it has it has
slowed down a little bit as a result of our forecast.
Below streaming is winning over linear as we predicted and
Netflix titles are very popular globally.
However, relatively High household penetration, when
including the large number of household sharing accounts
combined with competition is creating Revenue growth.
Headwinds So Netflix right off the bat is naming account
sharing and competition as to things that are getting in the
way of their growth, their outline, both of those things,
just a letter go or two letters ago.
So two quarters ago, they were shrugging off competition that
even outline it. As a factor acting like it was
no big deal. All of a sudden competitions, a
big deal for Netflix, so that's the first thing they were
shrugging off competition. Now, they list as a thing in the
way of their growth and a few years ago, like back in.
Thousand, fifteen and sixteen. There's tweets of Netflix in
encouraging people to share accounts, even outside of the
household. Now, they're saying that they
don't have the same Runway of growth and the account sharing
is actually getting in the way of them growing.
So they're trying to address that as well.
But these are two things that up until now weren't that big
problem for Netflix, at least for the investors, they looked
at this as not being an issue. People, shared the accounts that
lowered the turn rating and then competition wasn't a big issue.
Now, it seems like that's Lately change continuing on.
They say the big covid. Booster streaming obscured the
picture until recently, while we look to re-accelerate our
Revenue growth through improvements to our service and
more effective. Monetization of multi household
sharing will be holding our operating margins around 20%.
That's good. So their margins are staying
steady. That's about where they have
been historically. I think that's a good point for
their operating margins Key to. Our Success has been our ability
to create amazing entertainment, all around the world present to
in highly personalized ways. If and when we're viewing than
other competitors, these are Netflix as core strengths and
competitive Advantage together with our strong profitability.
We believe we have the foundation from which we can
both significantly improve and better monetize our lung our
service longer term. So that's their kind of
sugarcoating language, right? We still have a bright future.
We have a lot to learn. We can improve different things.
This isn't good though. Let's go ahead and look at their
growth Outlook. Now what they do here
undergrowth Look in their letter is kind of repaint the picture
of Netflix with kind of nostalgia.
Talking about how they created a streaming service and people
love TV and movies and games stuff that we've already heard
before. I don't want to re reiterate and
regurgitate all of this stuff but they still believe that
Netflix will continue to grow as there's more Broadband homes and
so on and so forth. That's basically what this is
saying. So let's go into the for
different reasons. Why Netflix thinks hit their
growth has slowed down and completely stopped at this point
first. It's increasingly clear.
Is that the pace of growth in our underlying addressable
Market Broadband. Homes is partly dependent on
factors. We don't directly control like
the uptake of connected TVs since the majority of our
viewing is on TVs and the adoption of on-demand
entertainment and at a cost. So this is all stuff outside of
Netflix's hands. We believe these factors will
keep improving over time. So that all Broadband households
will be potential. Netflix customers, I think
that's kind of a lame excuse. There's plenty of
internet-connected Swords out there that don't currently have
Netflix. So to blame that on broadband
connection I think is like I don't buy it.
I think this is a super flimsy excuse by Netflix s in addition
to our 222 million paying households we estimate that
Netflix is being shared with over 100 million households,
including over 30 million in the US and Canada region account
sharing as a percentage of our paying memberships hasn't
changed much over the years. But coupled with the first
Factor, it means it's harder to grow membership in many markets
and issue that was obscured by our covid growth.
So they're basically saying we just grew so much because of
covid that that cast a shadow on these underlying issues that we
otherwise could have been better identified.
I think that's what they're saying basically, covid growth
obscured us seeing this as a problem.
Now again, I see this as kind of a flimsy flimsy excuse.
This is consistent with how Netflix is always grown 30% of
their accounts being shared 60% of them being paid.
That's Sickly how they've grown since the beginning.
So, nothing's really changed. They've had the stat of the
entire time, but now all of a sudden when growth slows down
there highlighting, this is a big issue that suddenly needs to
be addressed kind of disappointing.
I'd assume the management would have been able to identify this
as a potential problem long before their growth like stops
overnight, right? So that's another thing that I
consider to be really disappointing.
Then they go on with the third reason competition.
This is their third reason for viewing with a linear TV.
Evie, as well as YouTube Amazon and Hulu YouTube has grown
massively over the past three years channels like Mayan are
upgrading their production, putting more effort into it,
they're getting editors and some people are getting writers and
stuff so you to is becoming a massive competitor in the video
space as well. And all of this stuff takes time
away from potential time. You could be watching Netflix.
So they say, however, over the last three years as traditional
entertainment companies, realize streaming is the future.
Many new streaming services have also While our us viewing share,
for example, has been steady according to Nelson, we want to
grow that sure faster, higher view shares an indicator of
higher satisfaction which supports the higher retention
and revenue. This is I think a more valid
excuse. I think this is something that
Netflix didn't anticipate having a pandemic and every single
company moving immediately into streaming.
That's something that I think would be difficult to anticipate
companies like YouTube have grown.
So substantially in Amazon has put so much money into it over
the years that I think there. Now being more competitive and
here Netflix shows this graph that's kind of you know a
portrays it a positive thing that they're still increasing
and even growing their their timeshare of the US.
But competition is certainly a factor.
So out of these excuses so far I think the competition is the
most valid Factor when I look at all the competitors to Netflix
that are rushing, their services in the streaming and pouring
tens of billions of dollars, I think that has to take away some
of the focus of what used to be the only good streaming service.
Flicks used to be the only good one now.
They're probably amongst the best but there's other good
alternatives for that. They say macro factors including
sluggish, economic growth, increasing inflation,
geopolitical events such as Russia's invasion of Ukraine and
some continued disruption from covid are likely having an
impact as well. And I don't really buy this
excuse that much as well. Macro factors are suddenly the
reason that Netflix isn't growing inflation.
Well tell that to all the restaurants that are getting
record sales or Disneyland. That's completely packed.
You're losing customers in the u.s. when people are willing to
spend thousands of dollars to go to Disneyland people, obviously
have enough money to buy Netflix, they're choosing to buy
other streaming services. So, I think the most valid
reason, out of all of these is probably competition.
I think that's what's eating away at their growth.
Now, moving on past, their list of excuses, we get into the q1
results and the queue to forecast, both of them are
terrible, the q1 results are terrible and the Q to forecast,
our disastrous. So let's go ahead and Jump Right
In. They say that paid.
Net additions were - 200,000. So this is the first time that
Netflix has ever in. Its history, ended a quarter
with less subscribers in, they started with, they literally
have less subscribers now than they did 90 days ago.
Now this quarter was disastrous. It was way below their
expectations, they were forecasting 2.5 million net
additions and they have four million the same quarter a year
ago. So it was already way.
Below what investors were expecting and they also had a
little bit of an excuse this quarter.
They have something that they can, kind of point the finger
at. They can say hey we pulled out
of Russia because of the war going on and problems there and
that lost us 700,000 paid net ads.
So if you actually remove Russia, they still gained 500
thousand. Subscribers, a basically tiny
amount way below forecast, that's if you factor in Russia
and the 700,000 subscribers they lost, but if you don't factor in
Russia there down to Thousand, which is a number, everyone's
paying attention to. So that's kind of, you know,
it's terrible, it's a bad quarter but not absolutely
disastrous because outside of Russia, they're still
technically growing, right? This last quarter, they're still
growing but this continues to get more concerning.
If we read on, they say the main challenge for the membership
growth is continued, soft Acquisitions across all regions.
So they're not really growing in any region, which is troubling
retention was also slightly lower relative to our guidance
for Or cast. So retention going.
Lower means turned going up a little bit and I think that turn
is going up because of the increased competition.
There's so many services that people might cancel Netflix to
try out HBO for a month or Showtime or Amazon Prime or
whatever. Now, they still point out that
the retention is very good. They say, although it remains at
a very healthy level, We Believe amongst the best in the
industry. Recent price challenges are
largely tracking in line with our expectations and remain
significantly Revenue positive. They In emea, which is Europe,
the Middle East and Africa, they were down three hundred thousand
paid net ads. Now again, if you exclude Russia
out of this in the one-time impact of that they were still
up 400,000 but not a lot 400,000, excluding Russia.
If you factor in Russia then they're down three 300,000.
We saw the slowdown, in our business, in Central and Eastern
Europe, in March coinciding, with Russia's invasion in
Ukraine, paid net additions in Latin America totaled - Thousand
similar to recent quarters. We believe the combination of
forces including macroeconomic weakness, and our price changes,
where a drag on our membership growth.
Now, they highlight that the United States, and Canada, paid
net additions of - 600,000. So they lost over half a million
subscribers in the US was largely the result of our price
change which is tracking in line with our expectations and it's
significantly Revenue positive. So they're basically saying we
realized we'd lose a little bit of subscribers in the US.
Over half a million which isn't a substantial amount but we
increase prices enough to more than make up for that.
So it was a revenue positive move there.
It's still troubling to see them, lose subscribers in any
case, but at least this was factored in, we're making good
progress in the asia-pacific or receiving nice growth and a
variety of markets including Japan, India Philippines Taiwan
and Thailand. So that's the only area by the
way that they grew was asia-pacific.
Every other region in the world, Netflix lost subscribers.
If we look at their forecasts for Q2, this is really where it
gets terrible. Here we go.
They say as a reminder the quarter, the guidance we provide
is our actual internal forecast at the time report for Q2 2022.
We forecast, paid net additions. This is for next quarter of - 2
million. They're forecasting.
The loss of another two million subscribers verse the 1.5
million that they made a year ago.
So Netflix is forecasting that they're going to continue
shrinking at least for another Order our forecast assumes
current trends persist such as slow acquisition in the near
term and price changes plus typical seasonality.
So Q2 paid, net ads are usually less than Q 1 paid net ads.
Now they say that we project Revenue to grow approximately 10
percent year-over-year and Q2 assuming a roughly mid to high
single digit year over year increase in average revenue
monthly on a on a foreign exchange neutral basis so that
is the positive news that Guess they're forecasting Revenue
growth but the big headline there is that they're losing
subscribers. The business is shrinking.
It's honestly amazing. What's happening?
This company is not growing anymore and they're saying that
they're going to start shrinking.
So after that we have the cash flow and capital structure and
this is one of the few little bright spots in this report free
cash flow, the metric. People typically say they look
at what the company like this. But nobody's looking at this
metric, it amounted to eight hundred and two million dollars
verse These seven six hundred and ninety-two million expected.
So they came in Above expectations, with free cash
flow and they are free. Cash flow generative company.
So, that's one of the things we expected out of Netflix, they're
going to be free cash flow generative.
What we did not expect out of Netflix, is that they're going
to start losing subscribers quarter-over-quarter.
That is completely against expectations of any investor in
the company. So that is a quick look at what
I think are the important parts of the earnings report to
summarize. What we just looked at, we have
the positive tear Netflix beat their earnings per share by 62
cents. That was actually pretty Can't
beat and this would be a positive thing if they didn't
have so many negative things. Overshadowing this.
So that was certainly a positive thing.
But investors aren't really paying attention to it.
They also have free cash flow of eight hundred and two million.
So eight hundred and two million dollars, free cash flow, 100
million above expectations, certainly a positive thing.
Netflix is beating their earnings, they're generating
free cash flow. Those are both good things.
We have the revenue growth, expectations of 10% for next
quarter even though they're having troubles the That they're
still growing. Revenues is a positive thing.
And in some cases, Revenue growth might be more important
than just subscriber numbers like in the u.s. they increase
the prices per subscriber, that lost them about 600,000
subscribers. But overall they're still
growing revenues as a result of that.
Now, we get into the bad part here.
Plus 500k subscribers, this quarter minusing Russia.
So if we take out Russia, they gained 500 thousand subscribers.
If we don't take out Russia, if Include that in the calculation,
Netflix has less subscribers this quarter by the end of it
than they started with. And this is something that in
and of itself is shocking. But I think that even more
shocking thing is, Netflix, expects this to continue for at
least the next three months for next quarter.
They're forecasting, a loss of 2 million net subscribers so
they're going to lose an additional 2 million subscribers
in addition to losing 200,000, this quarter.
So as of right now, Netflix has basically said we're done
growing. We're going.
Try to re-accelerate Growing. But as of right now for the
foreseeable future and what we're forecasting, we're done
growing. And fact we're shrinking and the
only way that we're really growing revenues or free cash.
Flows is by cutting away on our budget and increasing prices.
This is not the story that they've been sharing for the
past couple of years. The story that they're sharing
is that there's 700 800 million total addressable subscribers
out there and have plenty of room for growth.
And they'll be able to add hundreds of millions of
subscribers to the company. Well, now, it seems like there's
struggling to add any, they're not growing at all.
So overall, when I look at this news, my initial reaction is one
of surprise. I am surprised by this.
I'm not surprised by this quarter.
The quarter, they just reported losing two hundred thousand, net
subscriber gains as disappointing.
But they can kind of blame that on one-time events.
You know. They had the Russia thing, they
pulled out there that put them into the - subscriber net
additions for 1/4 but that is a one-off event and I'm a
long-term investor. So I'm looking at the long-term
of the Company. I have the short shelf life
stuff and the long shelf life stuff and basically what they're
saying is not only are we going to lose subscribers this last
quarter but we're forecasting even more losses in the next
quarter. So the question is, whether or
not, this is a bigger more persistent issue with this whole
business model, can Netflix grow past, 220 million subscribers is
that possible. If Netflix can't grow past 220
million subscribers can Disney, their goal is 350 million and 20
For how are they supposed to get the 350 million?
If Netflix which has substantially more content can't
even get past 220. So this raises a lot of
questions about the entire streaming industry and what this
means because right now, Netflix is basically saying we've hit
our wall and it's 220 million subscribers.
We are not growing past that. So overall, I'm pretty shocked
by this news. I am going to be considering it
thinking about it, over the next couple of days, I'll be
listening to their earnings report as well.
And the big thing that I'm going to be trying to Herman over the
next couple of days is if this is a one-time thing, if this is
just a tough year for the company, or if this is an
inherent business model problem. Can Netflix eventually grow
past, 220, million subscribers, or is the story completely dead?
Because right now they're actually making that a question.
So that's my thoughts right now. Not the outcome that I wanted,
but hey, that's how it goes. You win some, you lose some.
I appreciate all of you watching.
Even the haters. If you want to leave your
comments, you can do so in the comment section below.
I appreciate all your input. See you in the next one.