Later today, Netflix (NFLX) will report Q3 earnings. They will be the first to do so both in tech and streaming. It is interesting, though, that their earnings are not seen as indicative of what is to come from others in either tech or media: They will be analyzed solely on the basis of what they say about Netflix themselves.
Traders and investors will want to hear more about subscriber numbers. Are they still falling, or have they at least plateaued, if not bounced back? What about the recently announced tiered pricing that incorporates ads? How has that been received by consumers? And investors will want to know about plans for new, exciting programming. Are there any blockbuster shows or sequels to proven successes in the making? Those things are all important to the short- to medium-term outlook for the stock but, other than a big turnaround in subscriber numbers, is there anything that Netflix can say or do that would give the stock a long-term boost and put it back on a sustainable upward trajectory?
Well, yes there is, but they are unlikely to do it.
Netflix’s stock may have fallen this year, but they are hardly a company in trouble. Over the last twelve reported months, from Q2 2021 to the end of Q2 2022, they made $12.37 billion in gross profit. That translated to EBITDA of $6.23 billion and levered free cash flow of $16.7 billion. It is not profitability that has been the issue over the last nine months or so, just growth prospects. Maybe it is time that the company accepted the fact that they are no longer a growth story and positioned themselves more as a value play.
Of course, that is very hard to do for a company like Netflix, which has always subscribed to the view that if you are not moving forward, you are going backwards. However, their relentless pursuit of growth over the last decade has involved multiple reinventions of the company. It is easy to forget that they started as a mail-order video rental company, offering relics of the past such as VHS cassettes, then DVDs. The willingness to shift from VHS to DVD, then to streaming when that became available, is what has enabled Netflix to stay on top and keep growing.
As I pointed out back in April, each shift has been accompanied by 70% or so drops in their stock, but each time, the disruption has proven to be worthwhile in the long run. Now, though, there is no new content delivery technology in sight, so maybe it is time for Netflix to change not what they do, but fundamentally who they are.
The addition of ad supported memberships shows that in some ways they are prepared to do that in terms of commercial operations, but they could also do one or both of two things to change the perception at a corporate level. Netflix could announce a share buyback scheme or begin paying a dividend.
I am not a fan of doing those things as naked financial engineering tactics, designed only to support the stock and thereby increase the real compensation of those making the decisions, but this would not be that. It would simply be a recognition of reality. The environment in which Netflix operates has changed, forcing the company to change, too. They don’t have to chase growth at all costs anymore. They can instead focus on increasing their library of content and monetizing their users effectively. If they do that and maintain or even increase that massive cash flow, then returning some of that cash to shareholders is a logical thing to do.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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