Why Investors Should Be Celebrating Netflix's Q1 Results | 7investing
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Why Investors Should Be Celebrating Netflix’s Q1 Results

April 22, 2021

For the past year — really since the pandemic began — Netflix (NASDAQ: NFLX) has been adding subscribers at an astounding pace. Each time that has happened, the company has been careful to point out that it was essentially pulling customer growth forward. Because of that, Netflix’s leaders have been clear that there would be a quarter when growth would slow because of this.

That’s what happened in the first quarter. Netflix under-delivered on subscriber growth and the market did not heed the company’s previous warning. Dan Kline breaks down the company’s quarter with Maxx Chatsko and Dana Abramovitz on the April 21 edition of “7investing Now.”

A full transcript follows the video.

 

Dan Kline: Maxx Chatsko. Do you have Netflix? Are you a Netflix subscriber?

Maxx Chatsko:  I do I pay for it. I do not steal people’s passwords. So yes.

Dan Kline: Dana Abramovitz. Are you a Netflix customer?

Dana Abramovitz: I am not. And it’s mainly because I don’t have time to watch TV.

Dan Kline: So, I am. T-Mobile pays for most of my my subscription. I am not generally a watcher, but my wife and son like unsolved mysteries, not necessarily the show named Unsolved Mysteries, but sort of that true crime genre where you never know, sort of if they’re going to give you the result or not. So I can’t cancel Netflix, I think for most people, you’re never going to cancel Netflix. So what happened this quarter?

Netflix reported much slower subscription growth than expected and the stock was down about 8% last time I looked. But Maxx, this is actually a misread, because the entire pandemic and we see this with companies, the entire pandemic they’ve been putting out exceptional numbers. And as those numbers have been good, they’ve said, well, we don’t know when it’s coming, but we’re gonna have a quarter where we don’t grow as fast as we predict, because we’re pulling forward some of that growth.

So Dana, you run a business that I don’t know if people pay per class, or have subscriptions in your club. But if somebody comes to you and says I’m going to prepay for my next 50 classes, or I’m going to join for a year instead of a month, that’s a good thing, right? Like we’re sort of looking at Netflix’s success and holding it against them. Am I wrong there?

Dana Abramovitz:  Yeah, no, I agree. It’s always, you know, good to have, you know, those people that want to enjoy your products, right. So yeah,

Dan Kline:  And let me let me read from the company, “we believe paid memberships slow due to the big COVID-19 pull forward in 2020. And a lighter content slate in the first half of the year, due to COVID-19 production delays”. That is what the company said. Again, they’ve been saying this over and over. So let’s look.

Do you have that chart, Sam Bailey, that shows their membership growth, there it is. So look at the stunning growth in 2020 and 2021, these numbers are exciting, they’re big. It is a growing, growing company. But at some point, and you can take the chart down Sam, at some point, they are not going to add 10’s of millions of subscribers, they’re going to hit maturity. And I think maturity is soon. How are they going to make more money, they’re going to make more money by getting their content spend better by sort of reining things in.

We of course would like your questions and your comments. We will take them throughout the show. And of course, we might take some at the end. Netflix grew 24% year over year and was in line with its beginning of the quarter forecast, revenue [earnings] per share was $3.75. That is, above the $2.97 that was expected, their overall revenue was $7.16 billion. That’s slightly better than expected. And they don’t believe that Disney+ or Comcast or CBS All Access or whatever they’re calling that now Paramount+, or any of these new services hurt their business. So Maxx , you have Netflix do you pay for any other subscription services?

Maxx Chatsko: I actually don’t, only Netflix

Dan Kline:  I pay for a whole bunch of them. But I don’t think adding Discovery+, which we did because of the price point because we’d like to watch say Diners, Drive-ins and Dives at all times or, or you can always put on House Hunters and watch it. I don’t think that hurts Netflix, I think those second tier companies are going to struggle a little bit with, you know, with people churning and going in and out. But nobody’s getting rid of Netflix.

The challenge with Netflix. And the reason I don’t like it as much as Disney is because they have a lot of failures. They put a lot of shows out there that just nobody watches. I don’t care if their algorithm tells you somebody is going to watch it. The big hits are what matter.

So we’re going to take your questions. We’re going to take your comments, there is a big red flag here for me, they’ve announced a share buyback program. It’s only $5 billion. It’s very open ended. But this is a company that’s going to spend $49 billion in content this year, that they may be cashflow positive, but they don’t really need to be throwing $5 billion around. Maxx, we’ve seen this with companies or Dana, I’ll let you weigh in on this one. How do you feel about buyback programs in general? I would just rather a company uses its money well.

Dana Abramovitz: No, sorry. I had to unmute. Yes. Um, yeah, no, I, I agree. Yeah.

Maxx Chatsko: Also, I mean, look like they’re buying back stock at, you know, prices. They’re at all time highs, right. I mean, kind of not great timing after a giant run up in the last, you know, 18 months. So very questionable timing and use of cash, like he pointed out,

Dan Kline:  I actually think they might have announced it because they fully expected their stock to tank based on the subscriber number. This is this is a lesson in investing here that the numbers that the media fixates on aren’t the important numbers. So for Netflix, yes, you want to see subscriber growth, but you want to see subscriber growth over years, you’re not concerned quarter to quarter, you want to see that content spend go down, you want to see the ratio of hit to failure go up, every single show on Disney plus is a hit.

Disney essentially needs one show for kids. One show for, let’s call it all ages, I’d argue like “Falcon and the Winter Soldier,” and “WandaVision” are basically all ages shows. That’s all they need. Those are big budget shows. But when you produce a big budget show that you know is going to be massively successful and drive audience, it’s much less of a risk then then Netflix spending $250 million on a James Bond like movie that may or may not be successful. And even if people watch it, people may not like it.

We’ve got a couple of comments here. We’re gonna go in reverse order. Sam, we’re gonna take the comment from Max Lucas, a friend of the program we’ve had him on, “could you see Netflix start paying a dividend in the next 10 years as they hit maturity or are production costs too high?”

I think Netflix wastes too much money to pay a dividend. I we’ve talked about this before. It’s great to be a haven for creators, but you still need to rein creators in and I think you get a lot of super indulgent niche shows and I you know, I don’t want to bag on “Bridgerton” but I know a lot of people love to bridge it in. But I think they love it the way like people love like Medea movies like like, it doesn’t matter how like incredibly indulgent it is to the creator, no one said, Hey, this is a bad idea. This is a little over the top. And that can work sometimes it worked with both of those examples I just gave.

But a lot of times it leads to things like “Sense8,” which was the the family that created the Matrix, did a show that only lasted one season, because it was just incredibly self indulgent. And that is an awful lot of the Netflix content. And I apologize if you’re one of the like 30 people who enjoyed Sense8, or if I’m saying the name wrong, I’m not entirely sure. When you put a number in a wordy title. I’m not sure if I’m supposed to be saying it Sense “infinity”. I have no idea.

We’re going to take [name not known] comment and then we’re going to move on. “Do you think Roku will benefit from benefit from increased competition in the streaming field?”

Yes, I think Roku will benefit from the fact that streaming is becoming something that you absolutely have to have. So even people who are still cable subscribers might find that oh my god, I need ESPN+, because I want UFC. I need Peacock because I’m a WWE fan. Oh, those are two very similar examples. I need Discovery+ because I want to be able to watch. You know, “Bobby Flay Takes a Nap” or like whatever show Bobby Flay is producing or like, you know, “Guy Fieri’s Kids Make a Bagel” or like whatever ridiculous shows they have on that channel. I think people feel the need for that.

Yes, I think Roku is the absolute best player here. I own many Amazon Fire devices. I also own many Roku devices, I find them fairly interchangeable. But the fact that Roku is essentially Switzerland, they don’t really have their own content. They have the Roku channel. But that’s just an amalgam of of other people’s content that puts them in a really good position. And they are dominating. And I don’t think the new Apple device is going to change that because I did the math, you can buy roughly six Roku players for the cost of the low level Apple device. Maxx, you have a question here?

Maxx Chatsko: Yeah. Isn’t it ironic like, are we kind of just recreating what cable was like 20 years ago, because you need to now subscribe to like multiple different things. It’s like channel packages back in the 90s. Right.

Dan Kline:  So this is a you get what you wished for negative. People wanted a la carte pricing. And I don’t know if you’ve ever gone to a restaurant, a la carte. But when you go to a restaurant a la carte, you pay more than if you got everything on the plate. So when you go to a steak house, and usually there’ll be one or two dishes that come with a side and maybe maybe there’s a special It comes with super salad and aside that dessert, but if you order the steak, your side your appetizer that’s going to cost you more.

And what’s happening in cable is some channels will go out of business as cable has shrunk from about 106 million homes, to I don’t remember the exact number, let’s say 83 million homes. And some of those have moved to skinny bundles. So that’s another 7 or 8 million that aren’t getting say VH1 Classic or, or the Cooking Channel versus the Food Network. As those second tier channels stop getting the three cents, five cents, six cents, whatever it is, per cable home, they have to start cutting programming budgets.

And yes, that content is being made up for the fact that we do have the Discovery+ of the world where you’re getting literally like 18 shows from Chip and Joanna Gaines like as they’re revamping a house, they’re shooting a show about revamping the revamping and like how they went to the hardware store and whatever it is. But if you like niche content budgets for that are largely going away.