A new era in the streaming wars has dawned and Netflix has fallen out of favor with many investors, but in the long run, they’ll still be the benchmark for competitors.
Jan. 8, 2020
All of us have used it or at least seen it at some point in our lives, and whether or not you realize, Netflix (NASDAQ: NFLX) has changed the way we consume entertainment forever. For that reason, among others, it is unlikely that these new pretenders to the streaming crown in Disney (NYSE: DIS), AT&T’s (NYSE: T) HBO Max, and Apple (NASDAQ: AAPL) will ever reach the stratospheric heights of Netflix.
How is Netflix doing?
Like a child waiting for candy on Halloween, investors were glued to their devices in anticipation of Netflix’s holiday earnings report on January 21st. This particular earnings report was so eagerly anticipated as it was the first given since the launch of Disney+ in November — and to a far lesser extent, Apple TV+’s own launch in the same month.
On the surface, Netflix passed this first test with flying colors and did not vanish into the abyss under the weight of Disney’s might as many investors seemed to believe would happen. Despite U.S. subscriber growth falling 180,000 short of the 660,000 that was forecast, international growth came in at 1.3 million more subscribers than expected, while earnings per share of $1.30 eclipsed analyst expectations of $0.53. On top of this, the average revenue per user (ARPU) grew 9% year over year or 12% excluding the impact of exchange rates.
Impact of the competition
Netflix’s 8.7 million net new subscribers suggest that Disney+ is not quite a ‘Netflix killer’ just yet, even with the reported 24 million subscribers it has amassed in just 2 months. However, that does not mean that the ‘House of Mouse’ is not a credible threat.
Disney’s guidance was less than optimistic following its earnings call, which caused its stock to drop nearly 4% the following day. Its leadership displayed uncertainty about the next quarter, pointing to competition resulting in “modest headwinds to our near-term growth, which we have tried to factor into our guidance.”
While many investors have cited competition as a key factor in slowing domestic growth, the truth is that the company may have reached its natural saturation point in the market. There is still plenty of room for growth on a global scale, though.
What’s with Netflix’s smoke and mirrors?
Netflix does seem to desperately be looking to overhaul its entire metrics system. However, this is nothing new for businesses. Just last April, Twitter (NYSE: TWTR) changed its usual Monthly Active Users (MAUs) metric to Monetizable Daily Active Users (mDAUs), in response to the dominance of competitor Facebook (NASDAQ: FB).
Likewise, Netflix has decided to count a ‘view’ as watching more than two minutes, as opposed to 70% of the content, as it was before. The reasoning was to supposedly put its metrics on par with Google’s (NASDAQ: GOOGL) YouTube, but they are two very different companies. On top of this, the company unveiled a strange Google Trends chart to show the popularity of its new show, ‘The Witcher’, in comparison to rivals such as Disney’s ‘The Mandalorian’, or Amazon’s (NASDAQ: AMZN) ‘Jack Ryan’.
An unusual move considering has not even released its product globally yet.
Netflix will remain on top
Despite these oddities from Netflix, and the loss of investor confidence due to rising competition — which is set to increase this year with the launch of HBO Max and Comcast’s (NASDAQ: CMCSA) ‘Peacock — Netflix still looks to be the only service capable of maintaining a level of dominance at the top. Apple TV+ is, underwhelming, to put it lightly, Amazon Prime is still just, well, Amazon Prime, nobody is talking about HBO Max or Peacock, and Disney, albeit a credible competitor, still has a long way to go. On top of this, most competitors, especially Disney, rely on their low subscription costs in comparison, but will they be able to keep it low, and justify the price-per-content spend a few years down the line?
Netflix also showed that it can reduce cash-burn when required, with a negative free cash flow of just $1.7 billion last quarter, and expected flow of just $2.5 billion for all of 2020, making good on its promise that 2019 was a ‘peak cash-burning year’. All this, without resorting to allowing ads.
Finally, Netflix has been building its empire and content hoard for more than a decade now, virtually unopposed, and plans to keep pumping money into quality content. This appears to have paid off as the company received more Oscar nominations than any other studio this year. It had a great first-mover advantage where it lapped up a massive portion of the U.S. market, and they can now bring this strategy globally.
There are an estimated 4.4 billion internet users around the world. At 167 million subscribers, Netflix hasn’t even scratched the surface yet.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Netflix, Apple, Amazon, and Netflix. Read our full disclosure policy here.