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Netflix
On the podcast last week (E2215) we briefly discussed why B2B is more reliable than B2C in an inflationary, potentially weakening economy. We specifically said we wouldn’t want to be in Netflix. While the trend in slowing user growth at Netflix was clear, even we didn’t anticipate negative member growth. I appended Q1 2022 to the company’s chart below… You’ll notice that this is the largest miss Netflix has had since 2017, and the first negative quarter - although, if you exempt the lost accounts in Russia (the company suspended service), it would have been +0.5M.
Ben Thompson (of Stratechery) provides deeper insights in a post this week called Netflix Earnings, Netflix’s Struggling Growth Drivers, Netflix to Explore Advertising (note, this article is paywalled). If you don’t have a subscription, here are a few highlights.
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!
And, as Ben suggested just a few weeks ago… Why Netflix Should Sell Adds (note, this article is not paywalled)…
This is an interesting pivot for Netflix who has consistently stated that they were opposed to advertising supported models. The company’s founder, Reed Hastings, capitulated on his stance in the earnings interview. More from Ben…
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.
I second this perspective. It seemed like Reed was tossing out ideas in a brainstorming session. It appears that there was no research or testing put into the thesis.
Furthermore, in spite of growing TTM revenues to $30+ billion, the company was only cash flow positive for a few quarters during the pandemic. Another interesting point is that the company has produced -3.5BN in cash from operations from 2001-2022Q1.
This was always my worry with Netflix, they would be required to spend heavily in order to keep users on the platform, and if Netflix were to throttle back content creation, users would quickly migrate to alternative entertainment platforms.
Netflix'’s challenge going forward will be to figure out how to better monetize its user base and finally provide a return to its investors.
Supplemental Data
1 SuperCompounders
2 Macro
3 Energy
4 Tech
Cloud Multiples - Check out the most recent edition of Clouded Judgement for the latest SaaS multiples.
Semiconductors
Semiconductor Industry Association Global Billings Report
Bureau of Economic Analysis Semiconductor Import / Export
Cryptocurrency
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This post and the information herein are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and all employers and their affiliated persons assume no liability for this information and no obligation to update the information or analysis contained herein in the future.