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Netflix cancelling subscriptions 'is more a positive PR move than anything else': Analyst

Neil Macker, Morningstar Analyst, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss Netflix's latest announcement that it plans to cancel inactive membership. Macker also weighs in on the overall streaming industry, including how a lack of production in 2020 could leave an impact in years to come.

Video Transcript

ALEXIS CHRISTOFOROUS: Have you ignored your Netflix account recently? Well, you might want to stream something and fast because you could lose your subscription. Netflix is going to start asking its inactive users if they want to keep their membership. If they don't want it or they don't respond, the company's going to automatically cancel their service.

Joining us now to talk about this and more is Morningstar Analyst Neil Macker. Neil, good to see you. This story broke yesterday, and our team here on "The First Trade," we were talking about it during our meeting saying, you know, why would Netflix do this? Don't they want some-- a portion of their revenue to just sort of keep trickling in, you know, those folks who forget they even have a Netflix subscription and continue going with it? Why are they doing this?

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NEIL MACKER: Yeah, I think that's a fair point. You know, if you look at other industries like health clubs and things like that, that's a large part of their revenue streams.

I think for Netflix, it's a relatively small number of subscribers, and I think it's more of a positive PR move than anything else. I think what's going to happen here is it's people's whose accounts who haven't been used by either themselves or anybody else. I think if we remember a lot about Netflix, passwords are shared, things like that. So it may be that the main user is paying for it and not using it but somebody else is, and those accounts won't be turned off, just simply the accounts that are completely dormant, basically.

BRIAN SOZZI: Neil, I did want to ask you about your overall assessment on Netflix. You guys see fair value for Netflix $160. The stocks over $400. Why that level of cautiousness?

NEIL MACKER: Yeah, our cautiousness around Netflix is around a number of things. Number one, cash flow for the company has been negative for a number of years and looks to be negative going forward as well. So the burn is very high.

Number two-- and you're seeing this right now in the US-- competition is expanding heavily here. Disney's already hit over 50 million subs. Next week we'll have the launch of HBO Max. Peacock is launching from Comcast as well. Hulu is picking up subscribers. If we look to India, which is probably the next biggest market for Netflix in terms of potential growth down the road, Hotstar is doing amazingly well there, which is also a Disney product as well.

So Netflix right now is burning cash, even though they have, you know, over 180 million subscribers. So the ability to raise prices will be muted by this competition.

ALEXIS CHRISTOFOROUS: So what about content, which is what all of these platforms need to keep us wanting to pay for them? What does the content bag look like for Netflix? I mean, do they have enough to get them through the 2021-- even looking up to 2022 seasons?

NEIL MACKER: I think the company has more than enough to get them through this year. 2021 is looking a little more sketchy, and then 2022 I think would be very sketchy at that point.

One of the things for Netflix obviously is unlike a Disney, which has, you know, a large library that can pull things forward-- it's like they're doing with Hamilton in July-- the company is creating most of their content sort of on the fly here. And while I think they have enough to get through 2020 and maybe even the front half of 2021, if the production shutdown continues for a while, the company is going to be in trouble in terms of putting new content on that platform.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Neil Macker, Morningstar analyst for Netflix, thanks so much for making things a little clearer for us. So remember, if you have that subscription and you haven't used it and you want to keep using it, get back to Netflix, right? Thank you.

NEIL MACKER: Yep. Thank you.