In the space of six months, the streaming giant's stock market valuation has been divided by 4, seducing today many investors who see it as an ideal entry point. Netflix's setbacks kicked off a massive correction in the entire tech sector.
But the market finally seems to be coming to its senses, after valuing the group on fanciful projections. Netflix has now entered a new phase of maturity that will involve focusing on monetization rather than growth. This natural step is a real "test" for the whole streaming and SaaS sectors, which will have to prove the viability of their business model.
We are already seeing that the subscription model is less resilient than expected, when competition is rife. Streaming is a good example. Disney is executing perfectly in the ramp-up of its Disney+ platform. Thanks to its unrivalled catalog, it is winning in the family sector.
On the other hand, Netflix is being overwhelmed by Discovery Time Warner's offering, which includes the HBO Max catalog, in adult entertainment. The arrival of Paramount, the result of the combination of CBS and Viacom, adds an additional challenge. And of course, Amazon Prime is always present in the background.
Because even though Netflix has a superb brand, that doesn't guarantee success in streaming. Just look at the failure of Apple's platform, which never managed to take off. Another example is Discovery, which before its merger with TimeWarner, stagnated at low valuation levels for almost a decade, despite a real and proven earnings power. Yet another example is Disney+, which enjoyed a perfect launch and recorded 8 million new subscribers in the last quarter. Yet the service continues to operate in the red.
The question of profitability
In this new, highly competitive landscape, Netflix's offer is perhaps the hardest to decipher. Indeed, for investors interested in the streaming sector, the competition is not lacking in appeal: Disney is positioned as number one in the family market and has a major competitive advantage, thanks to a plethoric and already constituted catalog. Likewise, Discovery TimeWarner is rated at 7 times its profits, despite a very high debt load. It has a gigantic catalog, and Berkshire Hathaway recently acquired a stake in Paramount.
Some observers rightly point out that Netflix's structural problem is its inability to generate profits, as all cash flows must be reinvested in the production of new content if the platform wants to keep its subscribers. Because they consume series very quickly, in "binge" mode, and will go to the competition if they can't find any new content to watch. Netflix must therefore constantly renew its stock of productions and deliver hits, which of course is never guaranteed. However, production costs are constantly increasing, and with them the financial risk.
Moreover, the accounts of the streaming giant are globally unreadable, even by an informed analyst: it is therefore impossible to project a normalized earning capacity or a financial model that is even slightly reliable. The recent "return to sanity" in the markets should encourage Netflix to put its house in order. Obviously the process has already started, with layoffs and a repositioning of the offering.
Let's not get carried away too quickly
Despite the spectacular fall in its capitalization, we are still talking about an enterprise value of $95 billion for a turnover of $30 billion, i.e. three times the revenues without any demonstrated capacity to generate profits: conservative investors will pass...
However, it must be recognized that there are multiple levers that can be used to boost profitability: increasing subscription prices, advertising and hunting for shared accounts.
The Californian giant has 222 million paying members in more than 190 countries and a vast catalog of TV series, films, documentaries and unlimited video games. But the quality of this library is still far from matching that of the main competitors and it will take decades of successful investments to match them...
So Netflix remains a tempting investment, but it's best to keep a cool head, as the case is still speculative.