By George Glover
Settling down on the couch to watch football on Netflix could soon be as much of a holiday tradition as hanging baubles on the tree and serving homemade eggnog straight from the fridge.
After the success of the Jake Paul-Mike Tyson boxing fight, the streamer wants to crack a new market. Its push into live sports is about to get serious -- Netflix will show two NFL games on Dec. 25, and has lined up pop superstars Mariah Carey to open the show and Beyoncé to perform at half-time.
But there are risks. It's nearly four times as expensive to air an NFL matchup as it is to make a hit series like "Squid Game," and by wading into the fray Netflix will find itself competing against Big Tech giants with cash to burn. The shares also aren't cheap at the moment, trading near a record high, so investors shouldn't get carried away if everything goes off without a hitch.
Even that isn't guaranteed. Last month, the streamer broadcast a controversial bout between Paul, a 27-year-old internet influencer, and Tyson, a 58-year-old former heavyweight champion. The show was rocked by technical issues, with users reporting significant buffering and lag times. But 60 million households tuned in -- a number that will excite shareholders.
Programming Pivot
It's quite the pivot for a company that long said it wouldn't be going into live programming. "We're in live because our members love it," said Ted Sarandos co-CEO of Netflix on a second-quarter earnings call in July. "It drives a ton of engagement and it drives a ton of excitement, and those two things are very valuable." The company directed Barron's to the call transcript when approached for comment.
Adding live sports could also help the streamer bring in more money from advertisers at the expense of rivals like Walt Disney Co. and NBCUniversal parent Comcast. Last week, Oppenheimer & Co. analyst Jason Helfstein raised his price target on the stock to $1,065, implying it can climb 19% from its current level, citing a " $2.2 billion advertising opportunity" from live events.
But for the gamble to pay off, Netflix will need deep pockets. Sports rights are expensive: the streamer is paying $150 million to broadcast the two Christmas NFL games as part of a deal that means it will also air at least one festive game in 2025 and 2026, The Wall Street Journal reported.
Netflix's other programming is much cheaper to make, and often attracts more eyeballs. Smash-hit South Korean series Squid Game cost just over $20 million and has drawn in 265 million views since it launched in 2021. The NFL looks small-fry in comparison: the league's most-watched Christmas Day game last year, between the Las Vegas Raiders and the Kansas City Chiefs, had an average audience of 29.2 million, according to CBS.
To win the live sports battle, Netflix will also have to compete with streaming services owned by Big Tech companies, which can dip into fatter purses to pay for rights. Amazon.com forked out an eye-watering $11 billion in an 11-year deal to air the NFL's Thursday Night Football in 2023 and is paying about $1.8 billion a year to show National Basketball Association games on Prime Video.
Netflix may not be able to keep pace with that -- it generated about $2.19 billion in free cash flow last quarter. Analysts still expect a decent earnings boost from the foray into live sport, forecasting that earnings will rise 20% to $23.76 a share in 2025.
Content Caution
But even the Street's biggest Netflix bull, Jeff Wlodarczak, expects Netflix to be cautious. The company still sees live events as "a bit of an experiment," he told Barron's in a recent interview.
"If they can generate subs with sports content they'll go in that direction, but I don't think it's a must. It's more likely that Google or Amazon will," Wlodarczak, who rates the stock as a Buy with a $1,100 price target, said. He added that stocks like Liberty Formula One and WWE parent TKO Group are better positioned to directly benefit from the battle for live sports, because higher rights fees will boost their earnings. Netflix will start broadcasting a weekly live WWE show in January in a $5 billion, 10-year deal.
Disney's foray into cricket provides a cautionary tale. The media and entertainment company decided not to pay an extra $2.6 billion to retain streaming rights to the Indian Premier League in 2022 -- then lost 16 million subscribers from its Disney+ Hotstar service in just two quarters. In January, the House of Mouse agreed to dump 60% of its Indian business at a much lower valuation than what it had paid back in 2019.
And if you think sports rights are expensive, take a look at Netflix shares: they're up more than 80% this year, gains that make them look overvalued. The stock trades at 38 times forward earnings, compared with Disney's 18 times and Comcast's 8.5 times, and is priced at a 50% premium to competitors, according to FactSet data.
Much of Wall Street has become inadvertently bearish -- while 31 of the 54 analysts who cover the stock have it down as a Buy, their average price target of $838 implies it will fall about 6%.
If the NFL broadcast isn't beset by technical issues, Netflix shares may get another bump over the festive season: they hit a record in the aftermath of the Paul-Tyson fight, and have carried on rising since.
But the stock looks pricey, and the streamer is unlikely to move aggressively into sports when rights are this expensive. Investors should stay on the sidelines.
Write to George Glover at george.glover@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2024 01:00 ET (06:00 GMT)
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