To The Moon

$Netflix(NFLX)$We present two good reasons to be cautious about Netflix.

1. High content expenses

One of the most common concerns over Netflix and its business model is content development costs. To attract more users, the streaming company needs to keep refreshing its massive title catalog. Much of Netflix’s content is exclusive, one way that the company has found to differentiate from competitors.

Recently, Netflix has spent billions of dollars producing its own content, which has likely helped to drive a healthy increase in the total numbers of subscribers. However, some believe that this could be a race to the bottom, as streaming companies outbid each other for the best content available.

Some Wall Street analysts consider rising production expenses unsustainable. To meet these costs, streaming companies like Netflix need to keep plowing cash back into the business, leaving little for shareholders to justify the stock’s rich valuations.

One way to address this issue is to produce cheaper shows like Squid Game that still drive worldwide engagement and revenues. Of course, releasing killer content that is inexpensive to make is much easier said than done.

2. Slowdown in 2022

In the past decade, Netflix’s subscriber number has risen exponentially (see chart below). However, the ramp up may not last very long – at least not at the dizzying historical pace. During 2020, Netflix acquired around 30 million new active users, a phenomenon that has been partially credited to the COVID-19 crisis and stay-at-home habits. A year later, Netflix finds itself in a different environment.

Consumers have been spending less time at home and, consequently, watching less streaming content. The time spent on these platforms is expected to decrease further in 2022. Therefore, Netflix’s next few earnings seasons could be marked by a slowdown in the number of subscribers – which would likely impact not only the P&L and key operating metrics, but also investor sentiment.

Be wary and do your due diligence.