Netflix Bears on Parade

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Two weeks ago, I had an almost written “most important” story of the week column that I couldn’t quite get out the publishing door. And let me tell you: none of those stories compared to last week’s news stories in terms of impact.

Which happens in entertainment news. Some weeks, we get a light drizzle of stories. Others we get a deluge. Last week was obviously the latter. The LA Times’ Ryan Faughnder (and friend of the website) wrote that it could have been the worst week for streaming…ever.

So yeah, that’s the most important story of the week. While I love to zig when others are zagging, I’m not going to try to tell you that some other story is more important to entertainment than Netflix’s second bad earnings report in a row. If the upside of streaming disappears, then changing entire business models to capture that upside doesn’t really make sense, does it? 

I put my thoughts out on what Netflix should do next over at The Ankler, but obviously one column alone can’t contain it. I also put out my thoughts in a long thread on Twitter, but still I have more.

So let’s talk Netflix, the death of CNN+, and another story I couldn’t care less about.

Most Important Story of the Week – Netflix has Two Down Quarters in a Row

Given the whole gamut of implications, and everything I’ve written already, today’s column will be a grab bag of odds and ends on Netflix’s bad quarter:

To Start, Hat’s Off to the Bears

Some folks on Twitter have started to ask, “Hey, given that we all know who the super-Netflix bulls were, why don’t we hear from the people who were bearish on Netflix all these years?” Indeed! Why don’t we? 

(I’d love to do more podcast interviews, but I’m trying to figure out how to hide my voice. So if anyone has any suggestions, email me.)

If you want to know who I think “called it” most on Netflix—besides yours truly—here’s my list in no particular order

Andrew Freedman of Hedgeye. He’s only been on the entertainment beat since 2019, but right off the bat, he argued that Netflix’s stock price didn’t match reality. He’s a friend of the website, but it’s a friendship based on mutual respect; his analysis is some of the most honest out there. And he does a great job of holding himself accountable.

Michael Pachter of Wedbush Securities. He’s probably the longest lasting bull out there, even if he upgraded Netflix to “neutral” in the last few months. He’s also an expert on the video game industry.

Laura Martin of Needham. Her current claim to fame is advocating for Netflix embracing advertising at least two years ago. I haven’t read as much of her analysis (a lot of the financial analysts keep their stuff behind very expensive paywalls), but she’s been right on this one. 

– New Constructs. This firm has been on the “Netflix is overvalued” train since I started publishing. I stumbled onto their articles a while back and they have a unique approach that takes typical financial numbers and uses AI to try to standardize them. In this one, they call Netflix an OG “meme stock”, a phrase I love.

Michael Nathanson of MoffettNathanson. Though they’ve softened in recent years, Nathanson has consistently been skeptical of Netflix’s valuation too. (Like Martin, their stuff is usually behind expensive paywalls.) MoffettNathanson does some of the best work tracking cable subscriber losses too.

MasaSonCap. A fellow anonymous Twitterzen, MasaSonCap is a real life “buy side” analyst, meaning he buys stock for a living, typically for a hedge fund, though I don’t know where he actually work.s He also stirs things up on Twitter. (And yeah I mean he stirs things up.) He coined the #NetflixBearGang Twitter meme. 

– Richard Rushfield. So far, everyone on this list has worked in finance. I really did wrack my brain to think of more journalists or non-finance analysts to put on this list, but I couldn’t. Rushfield has been skeptical of Netflix as long as I have, which is probably why I write a column for The Ankler!

And that’s it. If that list seems sparse to you, yeah me too.

(Put me on the list as well. Obviously I had some of the biggest doubts about Netflix’s share price and future dominance of anyone on the list. I’m a founding member of the #NetflixBearGang for a reason.)

If you’re an editor of a major paper, over the last week, these are the analysts you need to give a call. For different reasons, they identified the weaknesses in the Netflix Bull thesis, and so they probably have a better take on what went wrong than the folks who thought otherwise.

Netflix Still Has a Free Cash Flow Problem

Beyond the fact that streaming isn’t winner take all, the total addressable market for streaming is smaller than most forecasts, international content doesn’t travel as well as hype, and shrinking all revenue-generating windows down to one means that streaming will lose money, I’ve always had one other big gripe with Netflix:

They don’t make money.

(Fine, I’m also concerned the streamers aggregating content will be bested by the devices/operating systems bundling streamers. So just those six issues.)

Some of you might say, but Netflix is profitable. To which I reply with my quarterly reminder that profit is not cash flow. Specifically, free cash flow. In layman’s terms, the amount of money you actually earn, not the profit you report to the government. Netflix has always made a profit, but floundered on the cash flow side of things. 

(Some people say, “Hey, Amazon barely made a profit for years, so who cares if Netflix is losing money if they’re growing?” which makes me shake my head in shame. In reality, Amazon started minting money by the end of the 2010s. They only lost money for a few years early in the stock bubble and bust of the 2000s. Amazon, while barely running a profit, actually did quite well in cash flow from early on in its business life.)

To me, cash flow is much more important than profit. The way every financial analyst—literally it’s finance 101—is trained to value a stock price is through the total value of discounted future cash flows. That’s it! Almost all of finance in a sentence! And it’s not future profits, it’s future cash flows!

Netflix has never made a lot of cash. And, as I’ve banged on about for years, Wall Street has consistently over-estimated when they would make money. If you asked Wall Street in 2015, by 2020 Netflix would make billions in free cash flow. If you asked again in they moved those numbers to 2022, and so on. This time last year, for example, analysts forecast Netflix to earn $15B in free cash flow in 2027. After Netflix’s second very bad quarter in a row, that number’s down to $8 billion.

Remember, as Netflix iterated in their letter to shareholders this quarter, their goal is to break even this year. So Wall Street expects Netflix to go from breakeven to $8 billion in free cash flow by 2027, even as subscriber and revenue growth stall. In other words, Netflix has a long way to go before spinning off large sums of cash.

What about my other predictions?

In my Ankler column last week, I pointed out that I was wrong when I predicted that Netflix would never add advertising to their product. But what about some of my other calls? Specifically, why isn’t Netflix putting their films in theaters or releasing their TV series weekly?

Probably because you can only change so many things at once. Netflix won’t overhaul their entire business model in one fell swoop because of one bad earnings report. Sure, putting films in theater is much lower hanging fruit than adding advertising, but they (somewhat arrogantly?) don’t think they need it. 

But I think they do. I heard Rich Greenfield speculate that say $5 billion of Netflix’s $17+ billion content budget is for films. Imagine if they released some of films in theaters and could get even 25% of that back. That would really help their cash flow!

Meanwhile, I don’t expect any TV series to “go weekly” any time soon. That’s too blunt a change. Instead, I expect more things like Stranger Things season four, which has two batches of episodes about a month a part (May 27th and July 4th). That’s about as close to a weekly release as Netflix may get, but it will serve partially the same purpose. Maybe another hit series will break up into three parts. We’ll see. I could also see more reality series being released in batches, a la Love is Blind.

My Solution: A Merger with Roku is The Answer

I also mentioned in my Ankler article that building an ad-tech platform from scratch is hard. Renting it from a third party is tricky too. Frankly, delivering ads well is a hard skill set to master, and Netflix needs to do something drastic. 

They probably need to buy someone. 

Buying a whole advertising tech stack is much simpler than trying develop the entire thing in-house. Which they could still try to do, but buying the right company could speed it up.

And since we’re talking about buying companies, we should let our brains go M&A crazy for a bit, right? The biggest result of yesterday’s and January’s stock corrections is that Netflix went from being a company with an enterprise value (debt plus market cap) north of $300 billion to one between $100 and $90 billion. Yikes. That’s a lot of value gone.

So let me toss out a crazy M&A opportunity for Netflix, that could solve their live TV or advertising problems. (Normally, I loathe M&A for merging’s sake, but if it aligns with the strategy, bring it on.) 

So here’s my pitch:


It, too, has seen its enterprise value go from a peak of $61 billion last year to about $13 billion now. Since that’s a steeper drop than Netflix, it’s actually a better time for Netflix to acquire them now than it would have been last summer. Say they offer a 25% value over the stock price, and you’re talking something less than 20% of Netflix’s total value. Roku has all the advertising tech and infrastructure Netflix will ever need, and it would provide Netflix a stronger negotiating position with the other Big Tech companies. It also provides diversified revenue streams as opposed to only Netflix’s streaming revenue. The Roku Channel also has linear streaming, another capability I think Netflix needs.

The other crazy idea I have? Buying Spotify. They too lose money like Netflix, but they also have advertising tech. Doesn’t it just seem like the two biggest, barely breaking even, independent music and TV streamers should be under one roof?

Last point. While we’re talking M&A, I fully expect a deluge of stories based on innuendo and rumor that now, finally, Apple (or tech giant TBD) will finally buy Netflix. (Actually, I’m surprised it hasn’t happened yet!)

My usual “bears can still acknowledge Netflix has strengths”

To conclude, my usual dose of nuance. Yes, I’m a Netflix bear, but I’m not blind to their current strengths. Or the fact that streaming being a bad business is bad for traditional studios as well! I’ve been saying all those things for years. All these statements could be true, and not mutually exclusive:

– Netflix is the streaming leader.

– Netflix will hold this position for at least a few years.

– Streaming is not as good of a business (in terms of ROI and cash flow) as traditional distribution (theaters, cable, DVDs, broadcast).

– But customers may prefer streaming to traditional distribution (At least for TV. Theaters may still survive.)

– Because streaming is disrupting traditional distribution, Disney and other traditional studios had to enter the streaming biz.

– So competition will be fierce for everyone, making a bad biz even worse.

Almost Most Important Story of the Week – CNN+ Dies an Ignominious Death

Unlike Netflix, I don’t have as many groundbreaking thoughts on the death of CNN+ after only a few weeks of life. Frankly, I doubted CNN+ would drive tons of subscriptions. Live news is nice to have when something makes it worth having (war breaks out, pandemics break out, Presidential elections), but for say 80-90% of Americans it doesn’t need to be on every day.

That’s why I liked the pitch of CNN+ as the ESPN+ equivalent in an HBO Max/Discovery+ bundle. It could have had live news, but been relatively cheap, so it adds value to those two services. Instead, it seems like Warner Media (the incarnation owned by AT&T) really thought CNN+ could live on its own. Discovery disagreed and will likely add in the capabilities of CNN+ to a larger bundled app later. So fair enough.

The one thing that does worry me a pinch is the implication for the economics of streaming and television production. The death of CNN+ is the death of 300 jobs for folks. And a pull back on content. Netflix has rumored they’ll tighten budgets too. If this contagion spreads to the other streamers too…well then, my worst case scenario is coming true. 

That does frighten me.

Lots of News with No News – Elon Musk Buying Twitter

Here’s what would make the news a better service: An “ignore on all platforms” button. Like Twitter’s ignore feature, but for the entire web. And maybe cable news or podcasts too. So if I press the button for, oh I don’t know, any stories about Elon Musk buying Twitter, suddenly every story on that ever disappears.

Don’t get me wrong, is it news that a billionaire is buying Twitter? Sure. Is it worth headlining at least six issues of one daily newsletter I read? I don’t think so. 

The analogy I’ve come to like is how much it would be covered in a paper issue of The Economist. Two of the last three issues had one article on it? That’ seems like the proper percentage of coverage.

(Yes, is the EntStrategyGuy advocating going back to reading actual magazines and newspapers for news? I am. I’ve shifted to that model in April with a slight break for Twitter last week. And honestly I learn more by reading actual paper products. Digital provides less tangible results. Plus I feel less distracted, outraged and anxious. Read Digital Minimalism.)

So yes, Elon Musk bought Twitter. That’s some news, but everyone else already covered the ramifications and I don’t have much to add, especially on its implications on entertainment industry strategy.

One also might wonder if there are any similarities between Tesla and Netflix, given that both are (or were) wildly valued compared to the rest of their industries because they were seen as tech/growth stocks. Hmmm.

Or wonder why more reporters and pundits haven’t made this connection.

The Entertainment Strategy Guy

The Entertainment Strategy Guy

Former strategy and business development guy at a major streaming company. But I like writing more than sending email, so I launched this website to share what I know.


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