Analysts at MoffettNathanson (MN) have inevitably admitted that the longer the current pandemic situation lasts, the bigger the benefit to Netflix, as both linear and OTT competitors will eventually be unable to debut new original content.
“In addition, given the looming negative impacts to advertising, movie theatre attendance and cord-cutting, traditional content owners will be forced to reduce their content spending into the future to preserve free cash, which should make Netflix a long-term winner,” said and MN report.
MN says that over the years the firm have happily debated the idea that Netflix can build a deep monopoly-like moat in worldwide content distribution akin to Google’s position in search or Amazon’s position in e-commerce. As such, MN thought that investors were over-estimating the free cash flow bounty that would accrue to Netflix when this cash-spending build-out was through.
“Yet, in hindsight, what Netflix has accomplished and what separates them from the competition is the sheer size of the investment spending tied to stable and recurring subscription revenue, which will now, due to this fetid environment, cause other companies to rethink their appetite or ability to play this game. As we have said before, the unwillingness of Peacock or HBO Max or even Hulu to aggressively build out outside the US is a singular gift to Netflix. The moat is their willingness to spend more than anyone else to deliver content to the home and now, given this crisis, that willingness should begin to generate meaningful long-term advantages as more cords get cut and other studios slow spend,” argues MN.
But MN’s support is not 100 per cent. It asks:
1) There is indeed a risk that the first half of 2020 will be a giant pull-forward of demand for both the second half of 2020 and the first half of 2021. If you are locked up inside your home for 180 days with nothing to watch and you didn’t sign up for Netflix, why are you rushing out to subscribe when social distancing rules may perhaps start loosening up?
2) A big part of the International subscriber growth came from Asia-Pacific which, as seen by the RPU trends, is being helped by low cost ($3 per month) RPU plans that have completely different customer lifetime values than $13 UCAN subscribers. Does the market understand that?
3) If there aren’t any near-term price hikes in the UCAN region, revenue growth (in the most developed region) is about to decelerate by a few hundred basis points or even worse if Netflix’s comments around a second half slowdown in sub growth bear true in this region.
4) The continued strengthening of the US dollar (driven in part by the Covid-19 crisis), given the imbalance of international revenues with costs, is materially impacting revenues and profits and offsetting the better than expected subscriber growth.
5) Taken all together, for a stock priced for perfection, isn’t there a risk to the high-growth algorithm that is underpinning the multiple? Given our beliefs that in the long run Netflix will emerge from this crisis better and stronger, will there perhaps be a better entry point over the back half of 2020?