To The Moon

Abstract

• Market's been quite perssimistic before Q1 earning, stock underperformed.
• Huge miss on subscriptions, lost 200k vs +2.5M consensus, first recession since 2011.
• Managers blame shared password accounts and fierce competition.
• Guidance for Q2 down, estimating 2.0M subscription loss.
• Adversiting business in talking, in next year or two.

$Netflix(NFLX)$After Q1's earning isreleased, plunging in after hours, price back to four years ago.

In fact, in the first quarter of this year, the entire streaming media did not explode, and the market's expectations for Netflix fell again and again, together with stock price.

Why did Netflix Downagain?

• The biggest negative is the number of net subscribers addedmuch lower than expected. Q1 actually decreased by 200,000 globally, the first decrease in 11 years, while the market expectation is still increasing by 2.5 million;
• Although the revenue is also slightly less than expected, the actual 7.87 billion US dollars, the market expected consensus is 7.94 billion US dollars;
• The operating profit was US $1.97 billion, exceeding the expected US $1.76 billion, and EBITDA was US $2.05 billion, exceeding the expected US $1.82 billion.

However,the operating expenses arenot decreased, bothR&D expenses and salaries exceeded market consensus. The increase in profit margin is mainly due to the reduction of amortization, which may due to the decrease of drama production cost, the decrease of newly invested dramas compared with before.

Conference call seems no confidence, managers concluded that,

• The overall growth of smart TV is slowing down;
• Users share account passwords, and 100 million people watch for free;
• The competition between platforms has intensified;
• Macro factors such as inflation, strong US dollar and withdrawal from Russian market

However, except that the Russian market is a special event in Q1, others have already appeared in previous quarters or in recent years.Netflix management did not pay enough attention to it.

We feel that there are several questions that Netflix needs to think about:

First, how big is the influence of the Russian market?

Netflix voluntarily withdrew from the Russian market and lost 700,000 subscribers. Even if these 700,000 Russian users are quite a few this quarter, they can only increase by 450,000 when added back to Europe, which is less than the market expectation after the downward adjustment in April (an increase of 950,000), and far less than the market expectation in the last financial report (an increase of 2.63 million). On the whole, it is still less than expected.

From the revenue point of view, there is no unexpected loss in Europe. After all, it is mainly prepaid mode, and the withdrawal from Russia also occurred in March. When Netflix withdrew from the Russian market before, it also said that the impact on revenue was within 1%. However, the impact of these 700,000 users on revenue may not be fully revealed until after Q2.

Second, why did user growth suddenly stagnate?

Netflix suffered a loss of users in the quarter, not only in the European market, but also in the coreThe heart market in the United States and Canada lost 600,000 of its most valuable users in the quarter. Only Asian markets grew, including Japan, India and the Philippines, but still fell short of market expectations.

Netflix executives believe that 100 million users share account passwords, which hinders growth.

We believe that,Shared accounts are not the main reason, and Netflix mainly underestimated the impact of price-rise on users.Therefore, when cracking down on shared accounts, Netflix executives will still experience unexpected "sequelae".

In fact, shared accounts did not appear in Q1 this year, but have always existed. The reason why Netflix acquiesced before was to let more users experience their services, thus driving new additions. However, those price-sensitive consumers don't buy it.

At the same time, in the big inflation environment, Netflix is jealous of the price increase in other industries, and once again raises prices in the US and Canadian markets. The cheapest non-HD packages are boosted by $1 to $9.99 a month, while standard packages are boosted by $1.50 to $15.49 and premium packages are boosted by $2 to $19.99 a month. In the past three years, there have been three price increases. It was expected that this price increase would increase the company's annual revenue by $1 billion, but the fact is,600,000 Americans and Canadians have directly switched to other streaming media, after all, now theyhavemore choices

With the intensification of competition, Netflix has actually lost its pricing power, but Netflix executives still live in the dream of "high position and high weight".

After Q1 performance came out, Netflix also learned from the painful experience and directly lowered Q2 subscribers to the "suicide" goal of reducing 2 million users.

Third, who influenced Netflix?

Netflix has too many rivals, and other streaming media manufacturers, as well as medium and long video and short video platforms, have robbed many users of their time.

In fact, Netflix's content anxiety is far from starting now. The explosion of Squid Game just shows that Netflix has no more "explosive dramas". Users are becoming more and more tricky in content. Netflix should not only have enough commercial producers to satisfy users' appetite, but also have enough artistic content to base itself on the film and television industry.

This year's Oscar is exactly what Netflix is "annoyed" about. In previous years, Netflix also spent too much money on the copyright of independent films, but always missed the awards. This year, the Buddhist Department participated and let$Apple(AAPL)$"CODA" took the place and won the Oscar best picture in one fell swoop, while his film "The Power of TheDog" was full of artistic sense, and the audience called it "too obscure".

From the recent industry reports, we can also see that other streaming media platforms that have sprung up everywhere are takingNetflix's market share.

In addition, Netflix does not recognize the influence of short video platforms such as Tik Tok, but the fact is that the influence is quite deep.

Fourth, what are the other growth points of Netflix?

Games and advertising are the directions that can produce the second curve.The former is the field that Netflix has stepped into, but the degree of overlap between gamers and drama users is too low; While the latter, Netflix has been silent, unwilling to really start the advertising journey like YouTube.

Co-CEO and founder Reed Hastings once firmly opposed platform advertising, arguing that it would affect the user experience. But CFO Spencer Neumann also began to change his tune last month.

There must be brave men under the reward, and advertising is lucrative. Netflix, which is in danger of being an enemy, may not adopt this model. Executives said in a telephone conference that they are studying it.And try to figure it out in a year or two.

In a word, Netflix is definitely in a "green and yellow" at present, which is no wonder that investors abandon it relentlessly. After the last financial report plummeted, there were bosses like Bill Arkman of Pershing Square who went against the trend and increased their positions. Is there any other investment willing to open the platform this time? But what is certain is that Netflix, which keeps the statusIt is bound to revaluation by investors.

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