Barrons -- Netflix’s Plunge Is a Wake-Up Call for Streaming ...........................................
THE TRADER
April 22, 2022
Netflix’s Plunge Is a Wake-Up Call for Streaming
By Nicholas Jasinski
Netflix stock’s epic post-earnings collapse this past week reverberated through the ranks of streaming stocks, dragging down shares of competitors left and right.
The streaming pioneer finished the week down 37%. Warner Bros. Discovery (ticker: WBD) tumbled 17%, Paramount Global (PARA) dropped 15%, Walt Disney (DIS) fell 9%, Lions Gate Entertainment (LGF.A) lost 8%, and AMC Networks (AMCX) shed 7%. NBCUniversal owner Comcast (CMCSA) slipped less than 5%, buoyed by cable-segment results at AT&T (T) and Verizon Communications (VZ).
Wall Street continues to wake up to the thesis presented in a recent Barron’s cover story: Streaming is a hit with consumers, and undoubtedly the future of how people will consume movies and TV series, but the business model just doesn’t work yet -- and for some companies, maybe never will.
A survey of 3,100 U.S. adults by Morgan Stanley analyst Benjamin Swinburne and his team found that the average household subscribes to 2.8 paid streaming services today, up from 2.5 a year ago and 1.8 in 2018. Consumers want to stream, and it’s not a winner-takes-all game. But there are many more contestants than places on the podium.
The streaming industry remains in a land-grab phase, with companies throwing tens of billions of dollars into original series and movies, marketing, and promotions. Following the Netflix (NFLX) model, legacy media firms will accept several years of unprofitable growth for their services, on their way to the Holy Grail of high-margin, recurring-revenue subscriptions with global scale. Big Tech giants Apple (AAPL) and Amazon.com (AMZN) view their streaming services as customer-retention add-ons to their more-profitable businesses -- not as profit makers.
The hard truth is that it’s difficult to make money in streaming when your competitors explicitly choose not to, and investors want to see profits. With interest rates on the rise and valuations of long-duration assets under pressure, Wall Street is less willing to underwrite cash-burning initiatives that might only begin to pay off several years down the road.
Some of Netflix’s issues are company-specific. The stock’s valuation on a variety of metrics towered above streaming rivals, giving shares more room to fall. Netflix already has 222 million subscribers and a multi-year head start. And management may have waited too late to begin working on an advertising-supported tier of the service. But competition will be felt at Disney+, HBO Max, Peacock, and Paramount+, too.
So what should investors do? They have options: Focus on the surest streaming winners (Disney, WBD, and Netflix), the companies with other revenue and profit levers to pull (Disney and Comcast), or the cheapest stock valuations (Paramount and WBD). Or perhaps avoid streaming stocks altogether until the dust settles and the path to sustainable profits emerges -- if that ever happens.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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