The Netflix Bearish Pitch 📺

The Netflix Bearish Pitch

Netflix bagged the most stock market gains of any stock on the S&P 500 during the 2010s and all without producing more than a handful of profit. For some, that’s inspiring. For others, it’s terrifying, and 30,000-percent gains do nothing to suggest how Netflix survives in a post-Disney+ streaming environment. Let’s give the bears the floor!

Before CEO and co-founder Reed Hastings goes to sleep at night, he writes out his lines, “get to scale, get to scale, get to scale.” There’s plenty of green grass overseas for him to market best-in-class in-house hits and attract new members, but it’s only when Netflix does reach peak sub growth that it can go into ‘profit mode.’ 

The company hopes to flex its pricing power, use efficiencies to cut content-making costs, and cut the marketing budget. However, bearish on-lookers fear for Hastings. The only thing he may be “getting to scale” are his problems!

On the first point, for example, analysts point to Disney+, Amazon Prime Video, and Apple TV+, which offer customers a second choice. Netflix isn’t the first and only streamer anymore, so it relies on exciting content to prove its “must-have” status to consumers.

Then, on the second point, making those shows won’t get any cheaper no matter whether there are ten million or one-hundred-million sets of eyeballs waiting on the other side. House of Cards, Peaky Blinders, and Bo Jack Horseman, generally cost what they cost to make. We’re not mass-producing iPhones here!

Compounding that, if Netflix does manage to stop new rivals from poaching its subscribers, it’ll have to produce a greater quantity of localized shows for viewers around the world. The Latin Americans have different viewing patterns to those living in Timbuktu. There’s no penalty for canceling membership to the streamer, so things could get expensive in stopping subscriber churn (a figure Netflix conveniently chooses not to disclose).

Anyway, to break even under the weight of all these costs, Netflix must “flex” its pricing power by 30% to 50%. A $3 monthly increase may be stomachable in the West, but it’s likely to price out vast swathes of the streamer’s overseas fans, and that’s pretty much a wrap!

The lowest price target on the Street for shares over the next 12 months is $173, but only four of thirty-two analysts rate the company a sell. Disney’s early results in the industry at least did away with Reed Hastings’ worst fears about subscriber loyalty, and most also agree that Netflix’s destiny is in its own hands. Sentiment in the Invstr community remains strong, 80% bullish, $10 billion currently invested, with a majority win-rate. 

For a window into why, check this out!