Friday, May 27

Netflix finally says the C-word

It’s a tough time to be a Netflix (NASDAQ:NFLX) shareholder.

Share prices of streaming stocks fell 24% on Friday, nearly wiping out all of their pandemic-era gains. That’s despite the fact that Netflix was one of the big winners early on when COVID-19 first hit, and has grown its subscriber base by almost 60 million in the last two years.

Apparently, the reason for the liquidation was a weak orientation. The streamer solicited just 2.5 million new subscribers in Q1, far less than its usual Q1 clip, and saw revenue growth slow to 10%. Beyond the headline numbers, though, there could be a bigger reason why stocks simply fell off a cliff.

A Netflix mural showing characters from its programming.

Image source: Netflix.

Competition, competition, competition

For years, Netflix co-CEO Reed Hastings and the rest of his management team have dismissed the threat of competition, saying the streaming market was huge and the company had long been up against streaming competitors like Hulu and Amazon Prime, as well as a host of other entertainment options like YouTube, video games, and social media.

However, in the fourth quarter report, Netflix seemed to be changing tune. In its letter to shareholders, the company acknowledged that competition had “intensified in the last 24 months” and said that additional competition could be affecting its marginal growth.

That seems like an understatement. In the last two years or so, Disney+ has grown from its November 2019 launch to more than 100 million subscribers worldwide, with virtually every traditional media company launching its own streaming service, including HBO Max, owned by AT&T, Paramount+ from ViacomCBS, Discovery+, and peacock of Comcastfrom NBC.

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Competition changes any market, and it’s foolish for Netflix to think otherwise. Now that customers have more choice, they will naturally be more selective and demand more from offerings like Netflix. While Netflix says its retention and engagement remain strong, it acknowledged that customer acquisition hasn’t returned to pre-COVID levels. He couldn’t pinpoint why, but competition seems like the most likely explanation. After all, entertainment companies have spent the last two years revamping themselves to launch new streaming services and stack them with content. Netflix, on the other hand, has stuck to the same playbook. While his content continues to resonate, the market seems to be saying that’s not enough to bet on stocks.

Netflix has also cut its prices in India, where it has run into trouble with rivals like Disney and Amazon, as well as traditional pay TV, which is as low as $3/month there, another admission that competition is hurting business.

time to think big

Netflix has been disruptive for most of its history, moving from DVD-by-mail to streaming and original programming in both English and local languages ​​around the world. But if the company wants to keep growing the way investors expect, it needs to make a big move.

That could mean moving into live sports, experimenting with ads, speeding up its game launch, or making a needle-moving acquisition.

An attractive acquisition target might be Nintendo (OTC: NTDOY). Buying Nintendo would help achieve two of Netflix’s stated goals: making it a competitive player in games and helping it establish franchises. The acquisition would give it a wealth of intellectual property, like the Mario universe, that it can monetize through shows, movies, and consumer products like toys and clothing. As a bonus, Nintendo is a cash flow machine and the stock looks cheap with a P/E ratio of 15.

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2022 will be the first year of the streaming era where Netflix will be free cash flow positive. It has the stability and access to capital to make a big acquisition, and it makes sense to pursue a strategy that has been successful for Disney, which has taken over Pixar, Marvel, Star Wars, and Fox to boost his entertainment empire. Netflix has a huge audience of over 200 million worldwide, making it an attractive partner for content creators. Adding something like the Indian Premier League, the world’s biggest cricket league, could go a long way to accelerate growth in India and attract cricket fans from other parts of the world.

A big acquisition from a company that has historically been averse to M&A would be surprising, but Netflix has to do something to stay ahead of the competition. Investors have just sent a clear message that what you are doing now is not working.

This article represents the opinion of the writer, who may disagree with the Motley Fool premium advice service’s “official” recommendation position. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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