Q3 was strong in terms of beating on the top and bottom line whereas the Q4 guide was very weak.
In the September quarter, Roku reported revenue of $761 million compared to $696 million expected. This represented 12% growth compared to 2.5% growth expected. On the bottom line, EPS of ($0.88) beat estimates of ($1.29). The company was expected to report adjusted EBITDA of ($75M) and instead reported ($34.4M)
In Q3, Platform revenue was up 15% and player revenue was down (7%). Strangely enough, Player revenue was stronger in Q3 compared to the two previous quarters when it was down (19%).
ARPU grew 10% to $44.25 and the company added 2.3M users. These two key metrics were strong compared to what other ad-tech companies have reported.
Despite the Q3 beat, the Q4 guide was troublesome. Roku was expected to report revenue of $906.6M for growth of 4.77% yet came in over $100M low with a guide of $800M. This represents growth of (7.6%). The adjusted EBITDA guide of ($135M) compares to Q3 adjusted EBITDA of ($34.4M).
I believe this statement is Roku’s admission they got the timing wrong on increasing opex:
“Our significant Q3 OpEx (operating expense) YoY growth was largely the result of robust hiring in late 2021 and early 2022 when we believed that the economy was emerging out of pandemic-related disruptions, and we were accelerating investments that we had previously deferred. We started taking steps to significantly slow the rate of hiring and other OpEx growth in late Q2, however, it will take a few more quarters for this YoY OpEx growth rate to normalize. We will continue to slow headcount and OpEx growth in response to the macro environment, while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value.”
Roku believes the scatter market is dropping quickly and they clearly stated it was not unique to them and was industry wide. They stated that advertisers lack confidence in the economy. This is affecting the Q4 guide on revenue. What you see below has essentially worsened for Q4, per Roku’s management.
Here is what was stated:
Anthony Wood
This is Anthony. So we are seeing – like Steve said, there's a lot of uncertainty. It's hard to say exactly what's going to happen in Q4, but we are seeing signs that Q4 is going to be worse in terms of the ad market than Q3 was, I mean we're seeing lots of big categories, pull back telecom, insurance. We're even seeing telemarketers planning on reducing their spend in Q4.
I think traditionally, Q4 is a very – the holiday season is typically the strongest period for a lot of companies, including Roku. But companies are pulling back their ad budgets because they're uncertain if there will be a recession or not. And so a lot of Q4 ad campaigns are being canceled. And so that's why I think this holiday season, given the unique set of environments and characteristics, is probably going to be different than the typical holiday season.
Conclusion:
Due to EBITDA issues, which management has stated “it will take a few more quarters for this YoY OpEx growth rate to normalize” we are looking for an exit. It will be Knox’s choice on how/when this happens given the valuation is already quite low.
When Roku opens tomorrow, it will be a 2 P/S. This is the type of valuation a company has that is going bankrupt or has a near-zero risk. Meanwhile, Roku has $2.02 billion in cash and is reporting ($91.9M) in free cash flow in the first 9 months. It’s unlikely Roku will need to raise next year or the year after. It’s also not isolated in its issues with ad budgets as we’ve seen the concerns around Q4 echoed across nearly every ad-tech company that has reported. The 2 P/S is more reflective of a company that needs to raise cash soon or a company that may go out of business or even a company that has inherent issues not reflected widely in its industry.
I believe we will buy this company again in the future if active accounts and ARPU continues to grow. These are leading indicators for media companies, and Roku will be on our radar quarterly to see when adjusted EBITDA gets sorted.
This article was originally published on Forbes on Oct 27, 2022,11:14pm EDTForbes on Oct 27, 2022,11:14pm EDT
Netflix lost it’s status as a FAANG when the stock fell from a $300 billion market cap to a $100 billion market cap this year. My firm entered Netflix in August as we fully expect the stock to become a FAANG again due to its revenue potential from ads and improving cash profile.
Given macro, very few tech companies have a catalyst of any kind on the horizon with many companies in a defensive stance. Netflix, on the other hand, has an offensive plan to grow subscribers and revenue even in the face of macro pressures.
In my free newsletter published on Forbes, I had stated in both June and July: “I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has work to do.”
My target for the roll-out was originally Q1 to Q2 2023, and instead, Netflix is rolling out the ad supported tier next week. My firm had entered the stock in August with a real-time trade alert, so the surprise 6-month roll-out was welcomed. The ad supported tier will monetize at the same rate or even higher than legacy tiers with a $6.99 monthly subscription combined with a $10 ARPU over time (needs time to ramp to reach this ARPU).
A high probability of revenue acceleration from ad tier combined with improved cash profile combines for an attractive stock for 2023. Not only will Q4 and Q1 provide some clues around the new trajectory but there is an additional catalystan additional catalyst in Q1/Q2. We are reserving details about this lesser known catalyst for our research members.
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Netflix is Expected to Return to 2021 Subscriber Growth Levels
Netflix had a sizable beat on subscribers and the stock breathed a visible sigh of relief as the company comfortably beat with 2.4M net adds compared to 1M to 1.2M expected. Consensus for next quarter was 4.1M with Netflix guiding for 4.5M. This will be the largest account growth since Q3 2021.
The largest contributor to growth is the APAC region at 1.4M new subs followed by EMEA at 0.6M subscribers and LatAm at 0.3M subscribers. United States and Canada reported 0.1M subscribers whereas in the past this region saw churn.
Revenue was up 5.9% compared to 4.7% expected. On a constant currency basis, revenue grew 13% YoY.
There is a miss on revenue for next quarter due to FX headwinds. The company guided for 1% growth versus 3.5% growth expected. On a constant currency, Q4 is expected to grow 9%. This creates a slight miss on FY2022 revenue at $31.5 billion guided versus $31.6 billion expected.
The AVOD tier is most likely targeting the 100M who are sharing passwords. Therefore, I believe Q1 is when the stronger results will appear from Netflix’s AVOD entry due to the password sharing being phased out early next year.
Here was the update:
“Finally, we’ve landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this out more broadly starting in early 2023. After listening to consumer feedback, we are going to offer the ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular.”
Operating margin came in higher than expected at 19% versus management’s previous guidance of 16%. There was a 4% decline from the previous year due to FX. The company is guiding for an operating margin of 4% to 8% next quarter, or 10% on a constant currency (CC) basis. This is due to seasonal spending on marketing and content, and on a CC basis, will be higher than last year’s 8.20%.
The revenue and operating margin beats flowed through to a net income beat of $1.39B compared to $961M expected.
Operating cash flow was at $557 million and free cash flow came in at $472 million. This means management has made good on its promise to see $1 billion FCF this year. It also implies FCF could be ($287) million next quarter as we are at $1.287 billion for the year.
Netflix reiterated regarding the FCF next year: “We continue to expect FCF of +$1 billion for the full year 2022, plus or minus a few hundred million dollars and substantial growth in FCF in 2023 (assuming no further material appreciation of the US dollar).”
There was a minor improvement in Netflix’s cash and debt levels with cash increasing to $300 million to $6.18B with net debt of $7.98B. This is down from net debt of $8.5B in the previous quarter.
The company had a big beat on EPS of $3.19 versus $2.17 expected. This included a $348 million non-cash unrealized gain from FX remeasurement on Euro denominated debt.
Was the Market Wrong About Netflix Saturation?
Netflix does not believe their market is saturated, rather that advertising opens up a new, sizable addressable market. The company offered the following information: “In the 190 countries in which we operate, our $30 billion-plus of annual revenue is roughly 5% of the combined estimated ~$300 billion pay TV/streaming industry, ~$180 billion branded advertising market, and $130 billion consumers spend annually on gaming. So, we believe that we have a long runway for growth if we can continue to improve our offering steadily over time.”
We had stressed in our previous free newsletter that the lagging discussion on Netflix is that there was a subscriber decline in Q1 of 200,000, excluding Russia and a subscriber decline of 970,000 in Q2. While critics believe this is due to saturation, it’s much more likely the decline is coming from a pull forward due to Covid as all media stocks – both streaming and social media – demonstrated outsized audience growth through Q2 2021. Therefore, Netflix is lapping some tough quarters for audience growth comps and announced in April their plan to have an ad tier to help combat this.
Management’s willness to combat subscriber falloff with an ad tier is why we entered in August prior to the subscriber beat.
Another important point we had highlighted was there is already evidence that Netflix is taking more market share than its peers. In fact, Nielsen raised Netflix’s market share earlier this year for engagement to 7.7% from 6.6%, which puts Netflix in the lead over any other competing subscription service.
Management could not be more clear in their Investor’s Letter or on the earnings call that having the streaming best content in the world is their #1 strategy for success. That is one reason I track statistics such as Netflix’s share of TV time very closely. There was discussion that Netflix fully accepts the cost of creating the content and is instead more focused on getting more value from $1 billion in content than their competitors.
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More on the Ad Tier
Here was the update from Netflix regarding the new ad-supported tier from the Investor’s Note:
“As we’ve been discussing over the past few quarters, improving our pricing strategy is an important near-term focus. Last week, we announced that we’ll be launching an ad-supported subscription plan on November 1 in Canada and Mexico; November 3 in Australia, Brazil, France, Germany, Italy, Japan, Korea, the UK, and the US; and November 10 in Spain. Cumulatively, these 12 markets account for ~$140 billion of brand advertising spend across TV and streaming, or over 75% of the global market.
To start, we’re keeping it simple by offering one low-priced ad plan – Basic with Ads – at a price that’s 20%-40% below our current starting price. So in the US, for example, Netflix will now start at $6.99 per month (compared to $9.99 today). The Basic with Ads plan will have ~5 minutes of advertising per hour, frequency capping and strong privacy protections.”
Netflix has been able to launch its ad platform within 6 months of the announcement. The announcement earlier this month was good news for Netflix investors who entered early despite many institutional analysts predicting it would be six months into 2023 before it rolled out.
Also on the earnings call, management stated they are not expecting any material financial impact this quarter from ads due to the intra-quarter launch. However, over time, the company expects the ad tier to be margin accretive. My personal take is that it can produce a slight boost in subscribers in Q4 and this glimpse is going to be one that I am very much looking forward to. Management has no visibility at this time as it launches in two weeks so it’s prudent to not guide beyond the visibility they currently have.
Summary/Conclusion:
I believe that one day, investors will look back and see that it was a buying opportunity when Netflix went down 35% in April of 2022 after the company announced it’s plans to move into advertising. The goal of the ad tier is address saturation head-on by increasing the addressable market.
Netflix beat on revenue, subscribers, operating margin, and free cash flow in the recent Q3 results with small improvements from Q2 across the board in what may have marked the bottom for this company. The Q4 guide is also in-line across the board.
The company is expected to be free cash flow positive this year. Netflix has only been FCF positive in 2020 and has not been FCF positive in any other previous year. The company also lost $3.3 billion in 2019 when it built its original content pipeline. The stock will now enter two years of FCF positive between 2022 and 2023.
Advertisers are likely to pay a high premium for Netflix’s Hollywood-level content. Notably, it was recently revealed Netflix plans to only have 5 minutes of advertisements which is why the ARPU target is $10, however, that comes out to a target of $16.99 per user with the $6.99 pricing tier.
It’s not only the 100 million people sharing passwords that illustrates what the uptake could be for a lower-priced tier, it’s also the high level of engagement the company’s content garners that could make for a nice equation for with demand from exclusive advertisers and supply from the premium content, that Netflix offers.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own Netflix at the time of writing.
Please note, we will be writing up pre-earnings notes on the forum for the stocks we own. You can access Netflix’s pre-ER here.
Highlights:
No major flags in the earnings report
For Q3, the company beat on subscribers, revenue, operating margin and free cash flow
Q4 guide is in-line across the board. Next quarter will see lower operating margin due to seasonality
The new ad supported tier rolls out in two weeks; we believe this is an underappreciated catalyst. The ad supported tier will monetize at the same rate or even higher than legacy tiers with $6.99 monthly subscription combined with $10 ARPU over time (needs time to ramp to reach this ARPU).
High probability of revenue acceleration from ad tier combined with improved cash profile combines for an attractive stock for 2023. Not only will Q4 and Q1 provide some clues around the new trajectory but we will also keep an eye on the upfront season in April/May.
The company is still trading well below its 5-year historic valuation
Financials:
Netflix had a sizable beat on subscribers and the stock is breathing a visible sigh of relief as the company comfortably beat with 2.4M net adds compared to 1M to 1.2M expected. Consensus for next quarter was 4.1M with Netflix guiding for 4.5M.
The largest contributor to growth is the APAC region at 1.4M new subs followed by EMEA at 0.6M subs and LatAm at 0.3M subs. United States and Canada reported 0.1M subs whereas in the past this region saw churn.
Revenue was up 5.9% compared to 4.7% expected. On a constant currency basis, revenue grew 13% YoY. There is a miss on revenue for next quarter due to FX headwinds. The company guided for 1% growth versus 3.5% growth expected. On a constant currency, Q4 is expected to grow 9%. This creates a slight miss on FY2022 revenue at $31.5 billion guided versus $31.6 billion expected. As was the case last quarter, the market is willing to overlook FX headwinds.
As we’ve covered in the past, I continue to believe revenue growth is too low for the upcoming ad tier and the roll-out of how to phase out password sharing.
Here was the update from Netflix regarding the new ad-supported tier from the Investor’s Note:
“As we’ve been discussing over the past few quarters, improving our pricing strategy is an important near-term focus. Last week, we announced that we’ll be launching an ad-supported subscription plan on November 1 in Canada and Mexico; November 3 in Australia, Brazil, France, Germany, Italy, Japan, Korea, the UK, and the US; and November 10 in Spain. Cumulatively, these 12 markets account for ~$140 billion of brand advertising spend across TV and streaming, or over 75% of the global market.
To start, we’re keeping it simple by offering one low-priced ad plan – Basic with Ads – at a price that’s 20%-40% below our current starting price. So in the US, for example, Netflix will now start at $6.99 per month (compared to $9.99 today). The Basic with Ads plan will have ~5 minutes of advertising per hour, frequency capping and strong privacy protections.”
Per our Pre-ER notes, analysts are expecting $10 ARPU from the 5 minutes of advertising when it’s fully rolled out, which puts this tier on par with other tiers for revenue growth.
Password sharing is being leveraged by 100 million viewers. Here was Netflix’s update on how they plan to monetize these users:
“Finally, we’ve landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this out more broadly starting in early 2023. After listening to consumer feedback, we are going to offer the ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular.”
Operating margin came in higher than expected at 19% versus management’s previous guidance of 16%. There was a 4% decline from the previous year due to FX. The company is guiding for an operating margin of 4% to 8% next quarter, or 10% on a constant currency (CC) basis. This is due to seasonal spending on marketing and content, and on a CC basis, will be higher than last year’s 8.20%.
The revenue and operating margin beats flowed through to a net income beat of $1.39B compared to $961M expected. Operating cash flow was at $557 million and free cash flow came in at $472 million. This means management has made good on its promise to see $1 billion FCF this year. It also implies FCF could be ($287) million next quarter as we are at $1.287 billion for the year.
For our position, this being reiterated regarding FCF next year is key: “We continue to expect FCF of +$1 billion for the full year 2022, plus or minus a few hundred million dollars and substantial growth in FCF in 2023 (assuming no further material appreciation of the US dollar).”
There was a minor improvement in Netflix’s cash and debt levels with cash increasing to $300 million to $6.18B with net debt of $7.98B. This is down from net debt of $8.5B in the previous quarter.
The company had a big beat on EPS of $3.10 versus $2.17 expected. This included a $348 million non-cash unrealized gain from FX remeasurement on Euro denominated debt.
A Few More Points:
Netflix does not believe their market is saturated, rather that advertising opens up a new, sizable addressable market. The company offered the following information: “In the 190 countries in which we operate, our $30 billion-plus of annual revenue is roughly 5% of the combined estimated ~$300 billion pay TV/streaming industry, ~$180 billion branded advertising market, and $130 billion consumers spend annually on gaming6. So, we believe that we have a long runway for growth if we can continue to improve our offering steadily over time.”
Early next month, Netflix goes live with its new ad-supported tiers. Netflix has been able to launch its ad platform within 6 months of the announcement. The announcement earlier this month was good news for Netflix investors who entered early despite many institutional analysts predicting it would be six months into 2023 before it rolled out.
Here is what we had stated: “It’s certainly feasible that strong ad partners can get Netflix’s global rollout accomplished in a year’s time – which is why I believe we will hear who Netflix has chosen as soon as Q2 earnings or by Q3 earnings. I don’t think we will need to wait until Q4 2022 as testing is likely to happen sooner.” — this timing is important not only because as investors we don’t have to wait too long to get a glimpse of the impact of the new ad tier (Q4 earnings) but also because this sets up Netflix for next year’s upfronts.
I foresee Netflix doing quite well during next year’s upfront season, which is when prepaid inventory is contracted between high-paying brand advertisers and media companies. Assuming there are no changes, we fully expect to hold our position well into this time frame (Q2 2023). This is primarily because Netflix has very high-quality content and because Pay TV advertisers are in some pain right now with the need to find strong content to place ads.
On the earnings call, management discussed the “collapse of Pay TV” stating they had underappreciated the effects that the Pay TV migration is having on advertisers. They specifically pointed to the 18-49 year old demographic.
Also on the earnings call, management stated they are not expecting any material financial impact this quarter from ads due to the intra-quarter launch. However, over time, the company expects the ad tier to be margin accretive. My personal take is that it can produce a nice boost in subscribers and this glimpse is going to be one that I am very much looking forward to. Management has no visibility at this time as it launches in two weeks so it’s prudent to not guide beyond the visibility they currently have.
Management could not be more clear in their Investor’s Letter or on the earnings call that having the streaming best content in the world is their #1 strategy for success. That is one reason I track statistics such as Netflix’s share of TV time very closely. There was discussion that Netflix fully accepts the cost of the creating content and is instead more focused on getting more value from $1 billion in content than their competitors.
Conclusion:
Given the new ad tier and the popularity of password sharing, I believe Netflix’s revenue estimates over the next few quarters and next fiscal year are quite low. When you combine this with a new cash profile for Netflix, this stock may be entering the perfect storm. Netflix has only been FCF positive in 2020, and has not been FCF positive in any other previous year. We will now be entering two years of FCF positive between 2022 and 2023.
This article was originally published on Forbes on Jul 22, 2022,01:44pm EDTForbes on Jul 22, 2022,01:44pm EDT
Netflix is trading at a 10-year historic low valuation, which means this is an opportune time to discuss the pros and cons of this stock should there be upside potential.
The lagging discussion on Netflix is that there was a subscriber decline in Q1 of 200,000, excluding Russia and a subscriber decline of 970,000 in Q2. While critics believe this is due to saturation, it’s much more likely the decline is coming from a pull forward due to Covid as all media stocks – both streaming and social media – demonstrated outsized audience growth through Q2 2021. Therefore, Netflix is lapping some tough quarters for audience growth comps.
Netflix management was clear that this quarter was “less bad” as they hinted the company is not exactly celebrating the results. The company technically returns to growth next quarter for subscribers with a guide of 1 million, yet this is a marked decline from the 4.4 million in the year ago quarter. As discussed, due to the overall impact across many media stocks from shelter-in-place, it would be hasty to believe there’s something inherently wrong with an individual company when the entire media industry was affected. It’s better to hold those conclusions until H2 2022 through H1 2023 after giving it a full year after tough Covid comps have cleared. Ultimately, media is very seasonal, and we should have a nice glimpse as to which companies emerge stronger by Q4 2022, as this is the strongest quarter seasonally.
With that said, there is already evidence that Netflix is taking more market share than its peers. In fact, Nielsen is raising Netflix’s market share for engagement to 7.7% from 6.6%, which puts Netflix in the lead over any other competing subscription service. This is due to high-quality content such as Stranger Things 4, which reported 1.3 billion hours streamed.
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Advertisers are likely to pay a high premium for Netflix’s Hollywood-level content. It’s not only the 100 million people sharing passwords that illustrates what the uptake could be for a lower-priced tier, it’s also the high level of engagement the company’s content garners that could make for a nice equation for industry-leading ARPU due to demand from exclusive advertisers coupled with the supply, or premium content, that Netflix offers.
Due to FX headwinds, Netflix missed on revenue in the most recent quarter at 9% revenue growth compared to 9.7% expected. However, on a constant currency basis, revenue growth was 13%. The same was true for Netflix’s guide, it was a miss due to FX headwind at 4.7% for the upcoming Q3 quarter, yet on a constant currency basis, it is a 12% guide on revenue and a beat in that regard.
Not surprisingly, the operating margin was also affected by the strong dollar at 20% in the current quarter and 16% for Q3. The strong dollar led to a slightly better EPS as Netflix saw a $305 million unrealized gain from F/X remeasurement on Euro debt.
The most important line item for Netflix is the company’s cash flow. Looking back, this has been troublesome for Netflix as the company lost $3.3 billion in cash in 2019 as it built up its original content pipeline. However, the company is on an entirely new trajectory with $1 billion in free cash flow expected this year and “substantial” free cash flow in 2023, per Netflix management.
The new and improved trajectory in free cash flow won’t change the company’s debt levels anytime soon. Netflix is firmly setting expectations for $10 to $15 billion in debt into the foreseeable future. This is necessary to continue to hold its place as the top media company in terms of revenue and engagement. Gross debt stands at $14.3 billion, when accounting for $5.8 billion in cash, net debt is at $8.5 billion. The company has been able to improve its cash content spend-to-content amortization ratio from 1.6X to 1.4X in 2021 and an expected 1.2-1.3X in 2022.
NETFLIX’S Q2 2022 INVESTOR LETTER
Forward-Looking Catalysts:
Netflix has a few new paths to monetization and to re-accelerate subscriber growth. The company is rolling out a new password-sharing plan and is also now partnered with Microsoft on ads to roll out in 2023. More time than not, cross-selling results in higher revenue where someone who would normally churn can now be monetized through ads. Likewise, viewers who can try out Netflix may decide to upgrade to remove ads. Ultimately, the move towards ads also helps Netflix to be more recession-proof in the event households decide to cut costs.
Risks:
We do not see the current soft subscriber numbers as a sign of saturation. Netflix has risen in market share over the past year. Instead, soft subscriber numbers are a result of the pull forward nearly all media companies experienced from Covid. We fully expect Netflix will return to normal subscriber growth due to the catalysts listed above.
Instead, the primary risk for Netflix is its debt in a rising rate environment. This may depress the company’s valuation more than its ad-tech peers who have strong cash flow and little to no debt during tougher macro conditions. Netflix cannot temper this debt if it intends to compete against other subscription streaming services and also the many broadcast networks that have migrated to streaming.
There is also execution risk with a pivot from subscription-only to also including the ad tier. We view the Netflix management team as perhaps the most capable in the industry of pulling off this pivot as they have consistently broken ground in areas much more challenging than introducing ads. In addition to this, CTV ads can monetize at $40 ARPU and we believe Netflix content will set a new record on ARPU. With that said, even if the execution risk is lower than it would be with other management teams, Netflix is likely to fetch a higher valuation after its proven the ad tier will be successful – ETA of H2 2023.
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What to Watch: Price Action for Netflix Stock
The big picture question to ask is – has NFLX put in THE bottom? There are 3 scenarios that could unfold from the current price range, that would help us manage risk around this question:
I/O FUND
Red: If NFLX breaks below $185, the odds favor one more low, which would be targeting the $147-$115 region. If this happens, it greatly reduces the odds that NFLX will see new highs in the next growth cycle.
Orange: The current swing up breaks above $250. If this happens, the odds favor a push into the $340-$405 region. If this scenario is playing out, we would see the uptrend stall in this region in a bear market rally. The same lower price targets would hold in this scenario.
Green: If any renewed uptrend can break above $405, the odds will shift towards a move to all-time highs.
Netflix bottomed in May while the rest of the market went on to make a new low. More times than not, stocks that bottom first, tend to lead into the next uptrend. This is a show of strength worth monitoring.
We only have 3 waves down from the 2021 high. This may not seem significant, but it is. If this 3-wave move down turns into 5 waves down (red scenario), the odds that we push deep into the orange range are low before the next leg down.
The Relative Strength Index (RSI) has reclaimed a significant level. Note the blue arrow on the RSI around 57. This was the spot where price topped just before the waterfall moment happened in this bear market. The fact that the recent push higher has reclaimed this level is a show of strength and an early sign that green/orange is likely playing out.
Conclusion: The odds favor a push into the $340-$405 region. As long as the next dip holds $185, the more aggressive play would be to buy into that dip. A safer play would be to wait for the breakout above $250.
Knox Ridley, Portfolio Manager at the I/O Fund, contributed to this article.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
This article was originally published on Forbes on Jun 24, 2022,01:43am EDTForbes on Jun 24, 2022,01:43am EDT
Netflix’s stock is down a staggering 71% year-to-date. The stock’s fall from grace includes dropping its FAANG-status as the company’s market cap has decreased from $300 billion to $75 billion. This was partly due to the company reporting it lost subscribers for the first time since 2011, with a loss of 200,000 subscribers in the most recent quarter. The company also forecast a decline of 2 million paid subscribers for the second quarter.
The earnings report caused the stock to immediately lose 35% of its value. Bill Ackman sold his Netflix shares for a loss of $450 million in three months, with some goading him for his decision while others congratulated Pershing Capital for being bold and walking away from a losing position.
Meanwhile, our focus was elsewhere. In our Netflix coverage following its earnings report, we had stated “we can’t help but salivate” over which ad platform Netflix might choose to power ads to hundreds of millions of viewers. Primarily, this is because we have consistently discussed why the trend of CTV ads has plenty of runway even during an epic market selloff.
The key point is this: the global juggernaut in media is essentially stating that CTV ads are the future for streaming.
Below, we discuss why a new perspective is needed as the 200,000-miss last quarter and the 2 million miss this quarter pales in comparison to the 100 million viewers who are sharing passwords that Netflix intends to monetize. In other words, I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has work to do (minimum one to two years for full global roll-out). Yet the path to adding more subscribers is finally clear for Netflix and will pay off long-term especially during times of inflation or muted consumer confidence as it drives down household costs across fragmented subscriptions.
Netflix’s Q1 Earnings
The company reported revenue of $7.9 billion, up 10%. Excluding FX headwinds, the revenue growth in the quarter was 14%. The company guided for 10% growth in the upcoming quarter for $8.05 billion in revenue. Net cash from operations was up from $777 million to $923 million.
Netflix has maintained a healthy operating margin above 20% for most quarters and EPS beat estimates at $3.53 compared to $3.75 EPS a year ago. However, the issue with Netflix has been the lumpy free cash flow since the company began producing original content with the majority of the company’s history being deep in the red on cash flow. The recent quarter was positive $802 million, yet the company still holds gross debt of $14.6 billion on the balance sheet and net debt of $8.6 billion.
Netflix reported a subscriber miss of 200,000, yet excluding Russia, the company had net adds of 500,000 as Russia contributed to a miss of 700,000. Regardless, it’s the upcoming quarter that has the market concerned as Netflix is guiding for a loss of 2 million subscribers.
Notably, Netflix has moved towards staggered releases of hits such as Stranger Things, which could reduce churn and help renew subscriber strength.
Netflix Entering the Ad-Supported Market
We had written an editorial a year ago on Forbes called the Crucial Difference between Netflix and Roku Stock. At the time, we pointed out that: “we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD) […] Ad-Video on Demand (AVOD) has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible.”
During the most recent earnings call, Netflix’s management team discussed the company’s plan to introduce ad-supported content:
“And one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription.And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription.
But as much I'm a fan of that, I'm a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”
Although Reed Hastings stated “the next year or two,” the New York Times later reported that Netflix told employees an ad-supported tier could rollout by the end of 2022. There were also rumors that Netflix may buy Roku, yet upon hearing the news, we quickly refuted this idea on Twitter:
Netflix’s debt load is one reason why it’s unlikely Netflix will buy Roku as the company has a current valuation of $12 billion. This would nearly double Netflix’s debt or the company could dilute shareholders which would weigh heavily on a stock already down 70% YTD. Plus, Netflix has its hands full as a content creator competing with Hollywood, which was referenced on the call: “We've been doing this for a decade. Well, first of all, that's about 90 years less timethat's about 90 years less time than all of our competitors have been at it.”
Here’s How Netflix Stock Could Make a New High
If Netflix pulls off the feat of making a new high, fundamentally it will need to be correlated to the global roll-out of ad-supported content. I anticipate the company will test an ad-supported tier in lower yielding markets before rolling it out in the United States and Canada where the company has an additional 30 million it can monetize. Due to the testing this is required, UCAN region is unlikely to see a roll-out in 2022, rather look for this in H2 2023.
On a technical level, Netflix is the only other FAANG, along with Google, that has not made a lower low. There are always two paths a stock can take: going lower or going higher. The probabilities improve that a certain direction is favored once a stock breaks specific price targets. The below chart is tracking the 5-wave move from the 2012 low.
What we will want to see for Netflix to make a new high is a break above $405. At this point, the odds are in the stock’s favor that the bulls are in control again. Typically, after a stock reaches new highs, it has to be monitored again to make sure the price holds. If this happens, we will revisit our analysis – which is published weekly in our free newsletter.
Because we deal with probabilities in the sentiment-driven tech sector, it’s also important to point out that below $115 is what we call no man’s land, where a bottom may be particularly tough to form. We call it “no man’s land’ when a stock can potentially be in free fall and we avoid even the best fundamental stories in these zones.
The chart above shows rare, bullish divergences in the chart which would point towards $450 being more probable than a break in support at $115. There are only two other times since 2012 that this pattern has manifested, and they both marked a turning point was close.
Netflix is also trading at a 10-year record for a low valuation, which sets up the stock for a sizable rebound. In fact, the company has not traded this cheap in terms of PE Ratio for over 10 years.
When you look at top line growth, the company has not traded this cheap since 2012:
Notably, Netflix must curtail content costs while competing in a market with many big players. However, despite the nominal subscriber miss, Netflix has actually gained market share from 6% to 6.4%.
Conclusion:
Ultimately, the market has read the situation wrong as Netflix is going to monetize nearly 50% more subscribers in the near-term (1-2 years). The ARPU from advertising is unlikely to be as high yielding as the subscription tiers, yet premium CTV content sees $40 in average revenue per user. We think Netflix could set a new record on ad-supported ARPU due to its premium content and captive audience. Despite a clear path to drive record revenue and record active accounts, the stock is trading at its lowest valuation on the top line and bottom line in 10 years.
My firm’s preference is to wait until we are closer to the ad-supported tier rollout before considering a position in Netflix. When we do enter positions, we issue real-time trade alerts to our Members and publish deep dive analysis to accompany the entries we make. Please consult with your financial advisor on any stock trades you make.
It will be interesting to discuss someday how Netflix’s share price dropped 35% following the news of an ad-supported tier. The stock price took a historic hit after the company reported a subscriber miss of 200,000 and a guide of 2 million subscriber losses for the next quarter. Meanwhile, the company has a surplus of 100 million viewers sneaking passwords that the company can monetize. In my opinion, the market has lost perspective of the bigger picture.
There are two analysts who have started to crunch numbers on the opportunity and they believe it will add a base case of $12 billion in annual revenue and up to $25 billion to $35 billion in annual revenue by 2030.
“Assuming a domestic launch in the first quarter of 2023 and a global rollout over the following two years, Morris has layered in an advertising-supported tier to his multi-year forecast for Netflix and now sees total company revenue approaching $75B by 2030, he tells investors.”
Currently, Netflix is at $29 billion in annual revenue. So, wow — a doubling of Netflix’s revenue in 8 years compared to the nearly 25 years it took to get to the first $30 billion in revenue (Netflix launched in 1997).
There’s been plenty of rumors around who Netflix might choose as an ad server and supply side partner. One reason we think Roku is a candidate is because of its strong positioning with first-party data that can augment Netflix’s publisher data for enhanced targeting. Roku can also make deals around promoting Netflix on its platform, which it did for Disney, since Roku’s ad platform is the primary product compared to The Roku Channel. We think this is a strong possibility because Roku has the richest first-party data in the industry due to owning the operating system where it hosts many applications.
On the other hand, Google is not a good choice as it’s a major publisher itself. YouTube TV happens to be Netflix’s closest competitor in terms of total US TV time at 5.7% and 6.4%, respectively. It’s rare to see Big Tech competitors’ partner with one another, which can result in helping the competitor become stronger. Even though there are rumors that Netflix and Google are meeting about ads at Cannes, those events usually have meetings between all major players without any guarantee of an outcome.
Pictured Above: YouTube is Netflix’s biggest competitor
Magnite has been floated around, and this could be a strong choice for its global exposure and its ad server, SpringServe, helps put the company on par with Roku’s ad server. Comcast’s FreeWheel could also make a good partner for Netflix as the company focuses more on live broadcast and is not in direct competition to Netflix’s premium content.
We think it’s less likely that Netflix goes with The Trade Desk as a publisher, — although certainly anything could happen. However, The Trade Desk will benefit from the increased ad inventory from a demand perspective.
Truly, no matter what ad platform Netflix chooses, more than one CTV ad stock will participate as programmatic allows bidding across many sources to increase fill rates. Due to Netflix’s premium inventory, however, the company may go with a private marketplace where only two or three sources are allowed to bid.
In regards to timing, I foresee Netflix wanting to take full advantage of next year’s upfront season, which means testing and rollout will need to happen by this time next year. Otherwise, Netflix risks losing out on contracts from premium advertisers due to timing and will need to wait until the following year Q2 2024. It’s certainly feasible that strong ad partners can get Netflix’s global rollout accomplished in a year’s time – which is why I believe we will hear who Netflix has chosen as soon as Q2 earnings or by Q3 earnings. I don’t think we will need to wait until Q4 2022 as testing is likely to happen sooner.
Why is that important? Because the global juggernaut has the ability to raise the tide of all boats on CTV ads. This is the biggest news to happen to the CTV ad industry – ever, really, due to the sheer size of audience that Netflix is capable of bringing to the CTV market. There will be a compounding effect as Netflix’s entry will also more ad budgets, more premium advertisers, — and really marks the moment when CTV ads are being taken seriously even by subscription services.
I wrote an article on Netflix published in Forbes below. Of course, the real angle here is that we own Roku and Magnite and we hope one of these two is chosen as the premiere partner. It’s not speculation to say so, rather it’s taken quite a bit of conviction in the face of a fickle stock market to repeat that CTV ads have a large runway ahead of them. Four years and two years later, respectively, from our first analysis and we now have Netflix agreeing with the CTV-ads thesis. I think we should take a moment to let that sink in – as there is no company bigger or more important to agree at this juncture.
If we enter Netflix, it would be above the $450 price target outlined below. The majority of our bullishness resides with the companies we already own and our research is more about the effects on our current positions.
Netflix Stock Could Rally with Ad-Supported Content
Netflix’s stock is down a staggering 71% year-to-date. The stock’s fall from grace includes dropping its FAANG-status as the company’s market cap has decreased from $300 billion to $75 billion. This was partly due to the company reporting it lost subscribers for the first time since 2011, with a loss of 200,000 subscribers in the most recent quarter. The company also forecast a decline of 2 million paid subscribers for the second quarter.
The earnings report caused the stock to immediately lose 35% of its value. Bill Ackman sold his Netflix shares for a loss of $450 million in three months, with some goading him for his decision while others congratulated Pershing Capital for being bold and walking away from a losing position.
Meanwhile, our focus was elsewhere. In our Netflix coverage following its earnings report, we had stated “we can’t help but salivate” over which ad platform Netflix might choose to power ads to hundreds of millions of viewers. Primarily, this is because we have consistently discussed why the trend of CTV ads has plenty of runway even during an epic market selloff.
The key point is this: the global juggernaut in media is essentially stating that CTV ads are the future for streaming.
Below, we discuss why a new perspective is needed as the 200,000-miss last quarter and the 2 million miss this quarter pales in comparison to the 100 million viewers who are sharing passwords that Netflix intends to monetize. In other words, I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has a lot of work to do (minimum one to two years for full global roll-out). Yet the path to adding more subscribers is finally clear for Netflix and will pay off long-term especially during times of inflation or muted consumer confidence as it drives down household costs across fragmented subscriptions.
Netflix’s Q1 Earnings
The company reported revenue of $7.9 billion, up 10%. Excluding FX headwinds, the revenue growth in the quarter was 14%. The company guided for 10% growth in the upcoming quarter for $8.05 billion in revenue. Net cash from operations was up from $777 million to $923 million.
Netflix has maintained a healthy operating margin above 20% for most quarters and EPS beat estimates at $3.53 compared to $3.75 EPS a year ago. However, the issue with Netflix has been the lumpy free cash flow since the company began producing original content with the majority of the company’s history being deep in the red on cash flow. The recent quarter was positive $802 million, yet the company still holds gross debt of $14.6 billion on the balance sheet and net debt of $8.6 billion.
Netflix reported a subscriber miss of 200,000, yet excluding Russia, the company had net adds of 500,000 as Russia contributed to a miss of 700,000. Regardless, it’s the upcoming quarter that has the market concerned as Netflix is guiding for a loss of 2 million subscribers.
Notably, Netflix has moved towards staggered releases of hits such as Stranger Things, which could reduce churn and help renew subscriber strength.
Netflix Entering the Ad-Supported Market
We had written an editorial a year ago on Forbes called the Crucial Difference between Netflix and Roku Stock. At the time, we pointed out that: “we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD) […] Ad-Video on Demand (AVOD) has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible.”
During the most recent earnings call, Netflix’s management team discussed the company’s plan to introduce ad-supported content:
“And one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription.
But as much I'm a fan of that, I'm a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”
Although Reed Hastings stated “the next year or two,” the New York Times later reported that Netflix told employees an ad-supported tier could rollout by the end of 2022. There were also rumors that Netflix may buy Roku, yet upon hearing the news, we quickly refuted this idea on Twitter:
Netflix’s debt load is one reason why it’s unlikely Netflix will buy Roku as the company has a current valuation of $12 billion. This would nearly double Netflix’s debt or the company could dilute shareholders which would weigh heavily on a stock already down 70% YTD. Plus, Netflix has its hands full as a content creator competing with Hollywood, which was referenced on the call: “We've been doing this for a decade. Well, first of all, that's about 90 years less timethat's about 90 years less time than all of our competitors have been at it.”
Here’s One Path to How Netflix Can Make a New High
If Netflix pulls off the feat of making a new high, fundamentally it will need to be correlated to the global roll-out of ad-supported content. I anticipate the company will test an ad-supported tier in lower yielding markets before rolling it out in the United States and Canada where the company has an additional 30 million it can monetize. Due to the testing this is required, UCAN region is unlikely to see a roll-out in 2022.
On a technical level, Netflix is the only other FAANG, along with Google, that has not made a lower low. There are always two paths a stock can take: going lower or going higher. The probabilities improve that a certain direction is favored once a stock breaks specific price targets. The below chart is tracking the 5-wave move from the 2012 low.
What we will want to see for Netflix to make a new high is a break above $405. At this point, the odds are in the stock’s favor that the bulls are in control again. Typically, after a stock reaches new highs, it has to be monitored again to make sure the price holds. If this happens, we will revisit our analysis – which is published weekly in our free newsletter.
Because we deal with probabilities in the sentiment-driven tech sector, it’s also important to point out that below $115 is what we call no man’s land, where a bottom may be particularly tough to form. We call it “no man’s land’ when a stock can potentially be in free fall and we avoid even the best fundamental stories in these zones.
The chart above shows rare, bullish divergences in the chart which would point towards $450 being more probable than a break in support at $115. There are only two other times since 2012 that this pattern has manifested, and they both marked a turning point was close.
Netflix is also trading at a 10-year record for a low valuation, which sets up the stock for a sizable rebound. In fact, the company has not traded this cheap in terms of PE Ratio for over 10 years.
When you look at top line growth, the company has not traded this cheap since 2012:
Despite the low valuation, Netflix now has a path to monetizing 50% more subscribers (100 million) including 30 million in the United States and Canada that are currently sharing passwords.
Notably, Netflix must curtail content costs while competing in a market with many big players. However, despite the nominal subscriber miss, Netflix has actually gained market share from 6% to 6.4%.
Conclusion:
Ultimately, the market has read the situation wrong as Netflix is going to monetize nearly 50% more subscribers in the near-term (1-2 years). The ARPU from advertising is unlikely to be as high yielding as the subscription tiers, yet premium CTV content sees $40 in average revenue per user. We think Netflix could set a new record on ad-supported ARPU due to its premium content and captive audience. Despite a clear path to drive record revenue and record active accounts, the stock is trading at its lowest valuation on the top line and bottom line in 10 years.
It will be interesting to discuss someday how Netflix’s share price dropped 35% following the news of an ad-supported tier. The stock price took a historic hit after the company reported a subscriber miss of 200,000 and a guide of 2 million subscriber losses for the next quarter. Meanwhile, the company has a surplus of 100 million viewers sneaking passwords that the company can monetize. In my opinion, the market has lost perspective of the bigger picture.
There are two analysts who have started to crunch numbers on the opportunity and they believe it will add a base case of $12 billion in annual revenue and up to $25 billion to $35 billion in annual revenue by 2030.
“Assuming a domestic launch in the first quarter of 2023 and a global rollout over the following two years, Morris has layered in an advertising-supported tier to his multi-year forecast for Netflix and now sees total company revenue approaching $75B by 2030, he tells investors.”
Currently, Netflix is at $29 billion in annual revenue. So, wow — a doubling of Netflix’s revenue in 8 years compared to the nearly 25 years it took to get to the first $30 billion in revenue (Netflix launched in 1997).
There’s been plenty of rumors around who Netflix might choose as an ad server and supply side partner. One reason we think Roku is a candidate is because of its strong positioning with first-party data that can augment Netflix’s publisher data for enhanced targeting. Roku can also make deals around promoting Netflix on its platform, which it did for Disney, since Roku’s ad platform is the primary product compared to The Roku Channel. We think this is a strong possibility because Roku has the richest first-party data in the industry due to owning the operating system where it hosts many applications.
On the other hand, Google is not a good choice as it’s a major publisher itself. YouTube TV happens to be Netflix’s closest competitor in terms of total US TV time at 5.7% and 6.4%, respectively. It’s rare to see Big Tech competitors’ partner with one another, which can result in helping the competitor become stronger. Even though there are rumors that Netflix and Google are meeting about ads at Cannes, those events usually have meetings between all major players without any guarantee of an outcome.
Pictured Above: YouTube is Netflix’s biggest competitor
Magnite has been floated around, and this could be a strong choice for its global exposure and its ad server, SpringServe, helps put the company on par with Roku’s ad server. Comcast’s FreeWheel could also make a good partner for Netflix as the company focuses more on live broadcast and is not in direct competition to Netflix’s premium content.
We think it’s less likely that Netflix goes with The Trade Desk as a publisher, — although certainly anything could happen. However, The Trade Desk will benefit from the increased ad inventory from a demand perspective.
Truly, no matter what ad platform Netflix chooses, more than one CTV ad stock will participate as programmatic allows bidding across many sources to increase fill rates. Due to Netflix’s premium inventory, however, the company may go with a private marketplace where only two or three sources are allowed to bid.
In regards to timing, I foresee Netflix wanting to take full advantage of next year’s upfront season, which means testing and rollout will need to happen by this time next year. Otherwise, Netflix risks losing out on contracts from premium advertisers due to timing and will need to wait until the following year Q2 2024. It’s certainly feasible that strong ad partners can get Netflix’s global rollout accomplished in a year’s time – which is why I believe we will hear who Netflix has chosen as soon as Q2 earnings or by Q3 earnings. I don’t think we will need to wait until Q4 2022 as testing is likely to happen sooner.
Why is that important? Because the global juggernaut has the ability to raise the tide of all boats on CTV ads. This is the biggest news to happen to the CTV ad industry – ever, really, due to the sheer size of audience that Netflix is capable of bringing to the CTV market. There will be a compounding effect as Netflix’s entry will also more ad budgets, more premium advertisers, — and really marks the moment when CTV ads are being taken seriously even by subscription services.
I wrote an article on Netflix published in Forbes below. Of course, the real angle here is that we own Roku and Magnite and we hope one of these two is chosen as the premiere partner. It’s not speculation to say so, rather it’s taken quite a bit of conviction in the face of a fickle stock market to repeat that CTV ads have a large runway ahead of them. Four years and two years later, respectively, from our first analysis and we now have Netflix agreeing with the CTV-ads thesis. I think we should take a moment to let that sink in – as there is no company bigger or more important to agree at this juncture.
If we enter Netflix, it would be above the $450 price target outlined below. The majority of our bullishness resides with the companies we already own and our research is more about the effects on our current positions.
Netflix Stock Could Rally with Ad-Supported Content
Netflix’s stock is down a staggering 71% year-to-date. The stock’s fall from grace includes dropping its FAANG-status as the company’s market cap has decreased from $300 billion to $75 billion. This was partly due to the company reporting it lost subscribers for the first time since 2011, with a loss of 200,000 subscribers in the most recent quarter. The company also forecast a decline of 2 million paid subscribers for the second quarter.
The earnings report caused the stock to immediately lose 35% of its value. Bill Ackman sold his Netflix shares for a loss of $450 million in three months, with some goading him for his decision while others congratulated Pershing Capital for being bold and walking away from a losing position.
Meanwhile, our focus was elsewhere. In our Netflix coverage following its earnings report, we had stated “we can’t help but salivate” over which ad platform Netflix might choose to power ads to hundreds of millions of viewers. Primarily, this is because we have consistently discussed why the trend of CTV ads has plenty of runway even during an epic market selloff.
The key point is this: the global juggernaut in media is essentially stating that CTV ads are the future for streaming.
Below, we discuss why a new perspective is needed as the 200,000-miss last quarter and the 2 million miss this quarter pales in comparison to the 100 million viewers who are sharing passwords that Netflix intends to monetize. In other words, I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has a lot of work to do (minimum one to two years for full global roll-out). Yet the path to adding more subscribers is finally clear for Netflix and will pay off long-term especially during times of inflation or muted consumer confidence as it drives down household costs across fragmented subscriptions.
Netflix’s Q1 Earnings
The company reported revenue of $7.9 billion, up 10%. Excluding FX headwinds, the revenue growth in the quarter was 14%. The company guided for 10% growth in the upcoming quarter for $8.05 billion in revenue. Net cash from operations was up from $777 million to $923 million.
Netflix has maintained a healthy operating margin above 20% for most quarters and EPS beat estimates at $3.53 compared to $3.75 EPS a year ago. However, the issue with Netflix has been the lumpy free cash flow since the company began producing original content with the majority of the company’s history being deep in the red on cash flow. The recent quarter was positive $802 million, yet the company still holds gross debt of $14.6 billion on the balance sheet and net debt of $8.6 billion.
Netflix reported a subscriber miss of 200,000, yet excluding Russia, the company had net adds of 500,000 as Russia contributed to a miss of 700,000. Regardless, it’s the upcoming quarter that has the market concerned as Netflix is guiding for a loss of 2 million subscribers.
Notably, Netflix has moved towards staggered releases of hits such as Stranger Things, which could reduce churn and help renew subscriber strength.
Netflix Entering the Ad-Supported Market
We had written an editorial a year ago on Forbes called the Crucial Difference between Netflix and Roku Stock. At the time, we pointed out that: “we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD) […] Ad-Video on Demand (AVOD) has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible.”
During the most recent earnings call, Netflix’s management team discussed the company’s plan to introduce ad-supported content:
“And one way to increase the price spread is advertising on low-end plans and to have lower prices with advertising. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription. And those who have followed Netflix know that I've been against the complexity of advertising and a big fan of the simplicity of subscription.
But as much I'm a fan of that, I'm a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense. So that's something we're looking at now. We're trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”
Although Reed Hastings stated “the next year or two,” the New York Times later reported that Netflix told employees an ad-supported tier could rollout by the end of 2022. There were also rumors that Netflix may buy Roku, yet upon hearing the news, we quickly refuted this idea on Twitter:
Netflix’s debt load is one reason why it’s unlikely Netflix will buy Roku as the company has a current valuation of $12 billion. This would nearly double Netflix’s debt or the company could dilute shareholders which would weigh heavily on a stock already down 70% YTD. Plus, Netflix has its hands full as a content creator competing with Hollywood, which was referenced on the call: “We've been doing this for a decade. Well, first of all, that's about 90 years less timethat's about 90 years less time than all of our competitors have been at it.”
Here’s One Path to How Netflix Can Make a New High
If Netflix pulls off the feat of making a new high, fundamentally it will need to be correlated to the global roll-out of ad-supported content. I anticipate the company will test an ad-supported tier in lower yielding markets before rolling it out in the United States and Canada where the company has an additional 30 million it can monetize. Due to the testing this is required, UCAN region is unlikely to see a roll-out in 2022.
On a technical level, Netflix is the only other FAANG, along with Google, that has not made a lower low. There are always two paths a stock can take: going lower or going higher. The probabilities improve that a certain direction is favored once a stock breaks specific price targets. The below chart is tracking the 5-wave move from the 2012 low.
What we will want to see for Netflix to make a new high is a break above $405. At this point, the odds are in the stock’s favor that the bulls are in control again. Typically, after a stock reaches new highs, it has to be monitored again to make sure the price holds. If this happens, we will revisit our analysis – which is published weekly in our free newsletter.
Because we deal with probabilities in the sentiment-driven tech sector, it’s also important to point out that below $115 is what we call no man’s land, where a bottom may be particularly tough to form. We call it “no man’s land’ when a stock can potentially be in free fall and we avoid even the best fundamental stories in these zones.
The chart above shows rare, bullish divergences in the chart which would point towards $450 being more probable than a break in support at $115. There are only two other times since 2012 that this pattern has manifested, and they both marked a turning point was close.
Netflix is also trading at a 10-year record for a low valuation, which sets up the stock for a sizable rebound. In fact, the company has not traded this cheap in terms of PE Ratio for over 10 years.
When you look at top line growth, the company has not traded this cheap since 2012:
Despite the low valuation, Netflix now has a path to monetizing 50% more subscribers (100 million) including 30 million in the United States and Canada that are currently sharing passwords.
Notably, Netflix must curtail content costs while competing in a market with many big players. However, despite the nominal subscriber miss, Netflix has actually gained market share from 6% to 6.4%.
Conclusion:
Ultimately, the market has read the situation wrong as Netflix is going to monetize nearly 50% more subscribers in the near-term (1-2 years). The ARPU from advertising is unlikely to be as high yielding as the subscription tiers, yet premium CTV content sees $40 in average revenue per user. We think Netflix could set a new record on ad-supported ARPU due to its premium content and captive audience. Despite a clear path to drive record revenue and record active accounts, the stock is trading at its lowest valuation on the top line and bottom line in 10 years.
Beth Kindig of I/O Fund joined Charles Payne of Fox Business News on April 22nd to discuss Tesla’s earnings and what it’ll take to get robotaxis on the road by 2024. She discusses a second company to keep an eye on that will likely safely facilitate more automation within vehicles.
Charles Payne also asked for Beth’s take on Musk’s takeover of Twitter, which Beth believes as a power user, Elon Musk is uniquely suited to clean up the bot issue and low-quality anonymous accounts that prevent advertisers from spending more on the platform. In fact, Twitter can see up to 66% of its traffic driven by bots.
The interview shifts to discuss what Beth Kindig is looking for from Snap, which she stated “all eyes are on DAUs” or daily active users. Later that afternoon, Snap missed on revenue and earnings, yet beat on DAUs and this helped prop the stock price up during a steep selloff across tech stocks. As Beth had stated, Snap’s stock price following earnings did, indeed, rely heavily on DAU growth and Kindig discusses why this was important to watch going into earnings. Notably, the I/O Fund bought Snap last quarter the day-of earnings for a 58% gain in one day.
Charles Payne also asks Beth what she thinks of Work from Home (WFH) stocks which Beth states given the cloud sector’s $100 billion pull forward, her analyst team is still tracking higher growth in 2022 than the pre-covid year of 2019. This means cloud should have a steady year and the firm is positioned in Asana and continues to watch Zoom Video, among others.
I/O Fund is once again proud to announce our record performance. The 1-year return since the inception of our portfolio on May 9, 2020, through May 7, 2021, is 236%, and the year-to-date cumulative return is 28% through July 31, 2021. We either beat $ARKK and other Wall Street Funds by a wide margin or tied the leading funds. After completion of an audit by an independent accounting firm, we are releasing our results.
Beth.Technology was rebranded to I/O Fund earlier this year. I/O Fund stands for input-output and this term is used across all computing. In addition to our recent name change, we have also introduced new features to premium members. Since then, we have been seeing growth in premium memberships globally.
I/O Fund has always shared its wins and losses with its premium members. We have a live portfolio that our members can view and we also send trade notifications to our members. Our intentional transparency builds trust with our members who eagerly await our views on various stocks.
We have developed a niche in tech investing and we continue to strive to be a market leader.
I/O Fund Performance
As you can see in the table below, our performance has far exceeded that of notable Wall Street Funds and broader market indices. For comparison purposes, we do not calculate total returns with dividends or management fees. In the table below, we show you an apples-to-apples comparison with no additional income factored in. As a reminder, this is our second audited result. The first was done earlier this year for the period May 9, 2020 to December 31, 2020, which showed a return of 116%.
Which Trends Worked?
One reason behind I/O Fund’s stellar performance is the firm’s ability to navigate tech trends successfully. We were one of the first to have exposure in blockchain, semiconductors, ad-tech, and cloud before the broader market identified these trends. This advantage led to solid gains when money flowed into these sectors. We were also bold enough to maintain up to 21% exposure in a single category.
We started to build a position on Bitcoin in 2019. I/O Fund successfully weathered the volatility so characteristic of cryptocurrencies by adding near bottoms and trimming near tops. We predicted long-term value in cryptocurrency so we stuck with our investments despite drawdowns. We have also recently launched YO/LO Fund, which is exclusive to cryptocurrency. YO/LO stands for “You Only Live Once” to help encourage our readers to take a chance in the cryptocurrency market. Our premium readers receive regular updates on cryptocurrency.
Since 2019, our firm successfully built a position in Nvidia. Our thesis was that Nvidia would become an AI leader in data centers. Back in 2019, our analysis was highly contested because, at the time, Nvidia’s data center revenues were declining.
More recently, our portfolio stocks have done well, regardless of supply chain-induced panic in the markets. Such curveballs only bolster our steady, strong conviction on a given thesis and we stand firm during market drawdowns.
In addition to our long-term buy and hold (LTBH) portfolio of about 20 positions, we also successful in momentum stocks, which we skillfully enter on a more short-term time frame.
“While most are dreaming of success, winners wake up and work hard to achieve it.” – Anonymous
How the I/O Fund Team Identifies Winners
I/O Fund is led by lead tech analyst Beth Kindig who has over a decade of experience in analyzing technology stocks. She has a large following on Twitter which shows her growing popularity among investors. Earlier in her career, Beth started to write about private companies and her analysis was very well received by readers and she began to garner press for her coverage of tech products in 2014.
Beth’s stock recommendations have been successful because she understands tech better than most financial analysts in the market today. Prolific knowledge and experience from attending tech conferences in Silicon Valley and writing an abundance of white papers and analyst reports for deals in the private sector cemented a strong foundation for her to accurately identify stock winners in the tech sector. She has also worked as an enterprise tech company’s product evangelist where she spoke about tech products to large audiences. She cares deeply about individual investors having access to the same quality of information as institutions in the industry so that they can maneuver the markets as adeptly as institutional entities can.
In the words of Beth Kindig, Founder and CEO of I/O Fund, “At I/O Fund, we believe tech requires a lead analyst with direct yet broad experience in the industry.” She further states, “This makes our investment strategy more advanced and can lead to higher returns.”
Knox Ridley is the Portfolio Manager of I/O Fund, who specializes in technical analysis. Tech stocks are volatile and there are often large drawdowns, so technical analysis is equally important. It's crucial to enter a select stock at the right time and sell at the right time. Knox and Beth pooled their money in May 2020 and launched the fund we know today.
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Knox started his career as an ETF wholesaler in 2007 before becoming a portfolio consultant for large RIA’s, FAs, and Institutional accounts. He is very keen on macro trends and is known for increasing and decreasing allocations for record returns. Knox is very popular in our forum where he posts daily and weekly webinars where he reviews entries and exits the portfolio plans to make.
“Conviction is key to sticking with a company over the long-haul, regardless of drawdowns; however, the market will always tell you what sectors and stocks are being favored today, which is where we shift focus,” said Knox Ridley, Portfolio Manager of I/O Fund. “We use relative strength screens to add to winners, as well as technical analysis to help us reduce risk when sentiment appears to be shifting.”
Some of his real-time trades on our premium site include Roku at $28.10 and $30, Nvidia at $31.50 and $51.20, Zoom Video at $62.40 and $73.50, Snap at $41.20, Magnite at $10, Datadog at $34.90, Asana at $33.20, and AMD at $48.40.
Beth Kindig and Knox Ridley expanded I/O Fund with a dedicated core team of analysts and marketing, technical, and account services to best serve their premium members.
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It’s our privilege to share that our subscribers have gains of up to 1150% from our free newsletter. Many of our competitors send free articles that are, essentially, clickbait for their premium services. In contrast, we spend hours researching informative, quality analysis that we then publish for free.
Some returns include +1150% for Roku, +560% for Nvidia, and +162% on Zoom. We have also correctly predicted trends like that involving Microsoft winning market share in the cloud market.
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According to critics, the riskiest quarter for fuboTV (FUBO) ("Fubo") was Q2 due to the off-season for major sports in the United States. The company went on to report a 196% YoY jump in its revenue to $130.9M. It was primarily helped by the strong growth in subscription revenue and advertising revenue. Subscription revenue grew by 189% to $114.4M and advertising revenue grew by 281% YoY to $16.5M. It was the fastest advertising sales growth in the company's history.
So much for a tough quarter – but how did Fubo accomplish this? That will be important to look at as the market has overlooked Fubo for its growth and the company has not been rewarded for the ongoing beats and guidance raise. We should clarify and say we think it's the retail market that has overlooked the company while institutions are quietly moving off the sidelines with ownership doubling since February from 229 to 470 institutions.
Source: Ycharts
Below, we will look at Fubo's recent history to form an opinion on why Q3 could be quite strong. We also pulled Apptopia data on downloads and sessions to look at engagement trends. Lastly, we revisit the major catalyst in Fubo's future: sports betting.
Why Fubo Crushed Q2
To call Q2 a seasonally light quarter for sports would mean only the United States is being factored into the analysis. This mistake was also made in Q1 when critics predicted the downfall of Fubo based on March Madness, a tournament that has roughly 17 million viewers.
Fubo's roots are in soccer. Fubo has the exclusive rights in the United States to stream the remaining 70 Qatar World Cup 2022 qualifying matches of the South American Football Confederation. This began in June. Obviously, Fubo will not capture this full TAM, but even a small percentage can have a larger impact than a tournament like March Madness.
Fubo was also able to score some major league baseball deals, such as a carriage agreement with Marquee Sports Network which gives access to the Chicago Cubs games.
Advertising grew from 10% of revenue to 13% of revenue for Fubo in Q2. We have seen the company re-accelerate from 70% during the Covid quarter to 281% in the most recent quarter (that is serious acceleration). Although those high triple-digit numbers can't last forever, it shows how the demand for advertising on the platform will help offset licensing costs as time goes on.
The average revenue per user (ARPU) increased 30% YoY to $71.43 and advertising average revenue per user showed a substantial 62% YoY growth to $8.70. Increasing ARPU and an increasing number of subscribers is a solid combination to have when taking market share as it shows the company does not need to discount the product to be competitive.
In addition to the advertising opportunity, the company is also the fastest-growing SVOD platform and is taking market share from competitors. The company had total subscribers of 681,721 (up 138% YoY) at the end of the June quarter, a net addition of 91,291 from the previous quarter. Meanwhile, according to the data from Statista, the global SVOD market in 2021 is expected to grow 23% YoY to $70.8B in 2021 and the US SVOD market is expected to grow 18% YoY to $32.1B.
This supports our original thesis in December that live sports audiences are the last to cut the cord and are the most coveted audience right now for this reason.
The streaming increased in the last quarter as monthly active users (MAUs) watched about 134 hours per month on average, which is reasonable considering Q2 2020 was a quarter where many people spent increased time indoors.
We have noted many times that the company is in a high growth stage and the street is discounting the company for its weak gross margins. However, the company's margins are improving.
In the last earnings call, it was mentioned by the CEO, "50% gross margins will be our long-term target. We will also look to target about $10 to $15 of advertising ARPU based on that 50% margin."
The net loss came at ($94.9M) when compared to ($73.6M) for the same quarter last year and adjusted EBITDA came at ($47.4M) when compared to ($41.9M) for the same period of the previous year. The adjusted EBITDA margin was -36% in Q2 2021 compared to -95% in Q2 2020.
Source: Earnings Presentation
The company's launch of Fubo Sportsbook is an important event to track in Q4. We've covered the sports betting opportunity in detail, including the projection that the industry could reach $155 billion by 2024. fuboTV has a better position than its rivals as they own their audience and it's an upsell rather than a new user acquisition loop. The company acquired Balto Sports and Vigtory to help release the free-to-play and sports wagering. When sports betting launches, we think we will then see Fubo's full monetization potential by combining subscriptions, advertising, and betting for global sports on one platform.
fuboTV CEO David Gandler predicts that nearly 40M to 50M people in the USA will subscribe to digitally delivered video networks in the next five years. He believes that his company can target about 10% of the market.
Q3 Earnings Preview with Apptopia Data
Fubo increased their full-year revenue guidance to $560-$570M, representing a 116% YoY growth at the mid-point, up from the previous guidance of $520-$530M. The subscribers for full-year 2021 are estimated at 910,000 to 920,000, up from the previous guidance of 830,000 to 850,000.
Third-quarter revenue guidance is between $140-$144M, representing 132% YoY growth. Subscribers are expected to be 810,000 to 820,000. The consensus analysts' revenue estimates are close to the higher end of management guidance.
In the past, we analyzed app downloads and sessions using Apptopia data to look at the health of the mobile app. Please keep in mind, this is not an earnings call as there can be other earnings surprises in terms of gross margins and profits that can cause a stock to sell off after an earnings report. We are also reporting on downloads and sessions, whereas Fubo reports subscribers.Please keep in mind, this is not an earnings call as there can be other earnings surprises in terms of gross margins and profits that can cause a stock to sell off after an earnings report. We are also reporting on downloads and sessions, whereas Fubo reports subscribers.
According to the Q3 data from Apptopia, Fubo's downloads accelerated 98% YoY and 82% QoQ to 2.29M.
Source: Apptopia
The sessions data shows 161% YoY growth and 43% QoQ growth to 176.79M. Please note, downloads show us a glimpse as to new activity but they do not represent subscribers who already have the app downloaded. Sessions help to provide more color, if we assume sessions were comparatively equal across subscribers in previous quarters.
The data below shows a spike in September. The start of the NFL season likely contributed, as well as exclusive coverage for the South American World Cup 2022 Qualifiers (CONMEBOL) in the US.
Fubo also announced its free-to-play games and FanView live stats feature for its September CONMEBOL matches. The players who answer questions correctly during the match get points and have the chance to win cash prizes. The integration of free games and FanView increased the engagement in fuboTV during its beta testing in June and this might also have led to the spike in demand in September.
In the words of David Gandler, co-founder and CEO of Fubo, "We believe this will mark the first time any company has integrated live streaming television, free games and live stats within the same platform, on the big screen. With free games and our upcoming Fubo Sportsbook real-money wagering app, we intend to deliver a truly interactive streaming experience, one that we expect will improve engagement and retention to fuboTV while also driving advertising revenue."
The most important thing we see in this data is that fuboTV broke out of its trendline on monthly sessions and downloads as the month of September marks an all-time high for the year. We will get a quarterly report from the company yet the data helps substantiate on a more granular level that Fubo is capable of sizable growth in a single month. The key takeaway is that September is 46% higher than the previous all-time high met in January during the Super Bowl.
As stated, downloads and sessions don't guarantee an earnings beat, however, as a long-term buy and hold investor, growth like this is what I look for. I also look for evidence that the thesis I formed is playing out. Therefore, I see this data as a positive and the flurry of announcements around sports betting is also a positive.
More Fubo Announcements …
While the market is aptly rewarding DraftKings with a 1-year forward P/S of 11, Fubo has quietly been gathering strength in sports betting while at a 1-year forward valuation of 4.4. We covered why we like Fubo better than DraftKings.
In the third quarter, Fubo completed the Market Access Agreement in Arizona. It also received approval to offer Online Sports Wagering in two states namely, Iowa and Arizona. On November 3rd, the company announced that Fubo Sportsbook is live in Iowa.
Fubo Sportsbook also entered a multi-year partnership with the New York Jets. There will also be a Fubo Sportsbook Lounge at MetLife Stadium for the NFL team's home games.
Fubo Gaming partnered with the Cleveland Cavaliers to promote its brands through various marketing avenues. More recently, it also announced a partnership with NASCAR (The National Association for Stock Car Auto Racing) to become the authorized gaming partner of NASCAR.
Fubo's distribution is also growing. The company announced in September that fuboTV will be available on VIZIO SmartCast TVs. Earlier in June, it launched in LG Smart TVs. fuboTV also announced a distribution agreement with AT&T SportsNet Rocky Mountain.
ROOT Sports and fuboTV announced a distribution agreement in September which will give fuboTV customers access to Seattle Mariners, Seattle Krakken, and Portland Trail Blazer Games. We think these regional adds are important to watch as one metro area has the capability to boost Fubo's user base.
Conclusion
According to the data, September was Fubo's best month this year by nearly 46% (i.e., it's not even a close call with January's Superbowl month). This does not guarantee quarterly performance but we certainly like to see growth trending upwards and we like it when this happens concurrently with new catalysts, such as sports betting. If you think of where this company was during the Covid quarters when live sports was shut down, the comeback has been quite incredible.
On that note, tech growth investing is not for the faint of heart and Fubo has certainly tested investors who prefer clearer financials. However, I've been analyzing OTT tech startups since 2011 and there are certain indicators I look for in terms of analyzing the strength of a product. Fubo hits on many of those indicators and I think investors will either relent if Fubo puts up a Q3 beat or they will get left behind in the dust once sports betting launches. One thing is clear, Fubo is not letting up.
