The fact that a company with under $15 billion of forecast annual revenue and less than 10 per cent net margin can lose $25 billion of market value in a day gives some idea of how overhyped the stock was in the first place – it came close to $200 billion of value before the fall this week.
That fall was based on missing a quarterly subs addition forecast: adding only 5.2 million against a 6.2 million guidance. That’s bad guidance but still a big net addition. Meanwhile Netflix continues to use debt to invest over $8 billion on content this year.
All numbers to do with Netflix are boggling. Boggling on the way up and, therefore, they will be boggling on the way down. If, or when, the slide looks systemic they will still achieve a boggling exit price, possibly from one of the newly-merged media combines, but much more likely from one of the other members of FAANG wanting to short cut a way to global media footprint.
To me, this scenario now looks a better than an each-way bet. The market is now picking up the clues that have been there all along that the Netflix model is fragile. It is fragile because it isn’t objective, it isn’t subject to logic.
The proposition of lots of SVoD content ‘among which you are bound to find something you like all for a low price’ is long gone. Netflix now has less quantity (others won’t license to it nearly as much for one thing) and lays claim to lots more quality – understandably, it wanted to focus on its multiple Emmy nominations rather than subscribers. It has certainly made some great TV. But when you sustain your model through hit-making you are bound to have very variable results; you are subject to unpredictable taste (I’m not buying that AI will accurately predict global audience taste any time soon), and uncontrollable events – I give you Mr Kevin Spacey.
A broadcaster can go through a bad patch and spend a couple of years at the bottom of the charts, but advertisers will still use it even if only to play off price with other networks. And, when its output picks up, it’s still right there in front of the audience. Netflix is more like a movie studio; most of what it makes is seen by very few, but enough frogs turn into princes to keep the box office busy – until they don’t. Part of the Netflix model, alongside no ads, is no contract – you can quit the box office anytime you want. How many studios have stayed on top for more than three years at a time? How many of them have crashed and burned, or been rescued from oblivion by a nameplate buy out by a platform or broadcaster?