Netflix ‘takes more shots on goal than anyone else,’ media analyst says

LightShed Partners analyst Rich Greenfield discusses Netflix earnings and how the streaming platform wants to include gaming, plus how AMC stock is falling due to a lack of moviegoers.

Video Transcript

JULIE HYMAN: Netflix having the biggest single day tumble going back to what, October of 2014, following subscriber growth that is lackluster versus what the company itself had been predicting, not to mention the street. Let's get Rich Greenfield's take, shall we? He's partner and media and tech analyst at LightShed Partners. Rich, you watch Netflix probably closer than anybody out there in terms of analysis. What happened here? Do you think that this is also partially that the company did not prepare people well enough for this kind of a disappointment?

RICH GREENFIELD: Well, I mean, I think what's sort of interesting is you're seeing the stock down over 20%. You're seeing most of Wall Street just throw in the towel and downgrade the stock and say, instead of this thing being worth $700 million or whatnot, it's now only worth $400 million. I think the reality is, we're still very early in the streaming conversion from linear TV to streaming television.

It's hard to believe that with 220 odd million subscribers that that's the ceiling or that 250 million is the ceiling. Broadband is in, you're talking about there's probably 600, 700, 800 million homes with high enough quality broadband to support Netflix streaming or any streaming service. But let's step back. In the last quarter, they added 8.3 million subscribers and they're telling you even with a price increase in their largest market, they're going to add another 2 and 1/2 this quarter. So in Q4 and Q1 alone they've added you essentially 11 million subscribers.

This company is not, this is not over. I think, is it a straight line? No. I mean I followed Netflix for a long time now. There has never been a simple answer to why they miss. I remember, you can go back in time and they were talking about the chips and credit cards they were struggling with. Like, they were sort of making up excuses for why they missed numbers or missed growth expectations in the past. I think they were pretty honest. They don't exactly know all of the pieces.

I think what we do know, is that Netflix takes more shots on goal than anyone else. You saw that with "Squid Game." Nobody had "Squid Game as the breakout hit that was going to fuel Q4 a year ago. But yet, that's exactly what happened in Q4 was, "Squid Game" was a huge tailwind. So you don't know what's going to drive Netflix. They take a lot of shots on goal.

And my guess is, something's going to happen over the course of the next 11 months that's going to surprise people, because of the amount of shots on goal that they're taking. No one's giving them credit for that today. Everyone's just throwing in the towel trying to extrapolate out of one quarter of disappointing numbers relative to looking at the big picture and going, they have 33 million subs in all of Asia-Pacific X China. That number can be 300 million over time. There's still lots of growth to go. Unfortunately, and this is what the market has to deal with, it isn't always the pretty straight line that the market would like.

BRIAN SOZZI: Rich, is one of the reads off of this quarter though, that just given the market reaction and just the mood on the street after this, does Netflix have to take even more shots? Do they need to go out there and buy a gaming publisher? Do they need to invest even more in original content on top of really the large sums they are investing in?

RICH GREENFIELD: Well, certainly, that's, I think the statement you just made is certainly why the rest of the group is suffering. That's why Disney's down, that's why Viacom's down, that's why Discovery is down, is there is certainly a fear that heck, if Netflix doesn't have enough content to continue to grow subscribers, imagine what everyone else has to do. They're spending far, far less than Netflix. So it just sort of speaks to how hard streaming is not just in content, but in tech spending, et cetera.

But I think the answer to Netflix is they are spending more. I mean, I think that's, the thing that investors should be looking at and taking this as an opportunity to buy more versus to sell, is that Netflix is not telling you they're cutting spending. If Netflix was telling you, look, it doesn't make sense to spend more money. There's no more subs. We've reached that ceiling, that streaming war ceiling of like 220 or 250 million, like there is no more subs to get. That would be a really negative sign that Netflix has gone X growth and it's over.

Instead, what they're telling you is, it's early. We don't fully understand why we're not growing faster right now. We're investing more in content all around the world, and we are confident that over the long term, there is still a massive total addressable market, their TAM of hundreds and hundreds of millions of subscribers to capture. So I think they're actually very confident in the next several years. I think it's Wall Street that has no confidence in that and is just worried that this growth story is over.

JULIE HYMAN: To pick up on one small thing though that Sozzi was asking about, and that's gaming, the company did introduce mobile gaming during the quarter. Now I don't know what the numbers are looking like and I don't know, so I guess what I'm asking is, even if the total addressable market is enormous, there's also on top of that another enormous market that's a different one for something like gaming. And is that--

RICH GREENFIELD: And look what's happened, and look what's happened in the last week. I mean, I'm sure you've been talking actively--

JULIE HYMAN: Exactly, exactly.

RICH GREENFIELD: --About Microsoft and Activision and about Take-Two and Zynga. There is clearly tremendous interest in the power of mobile gaming or just in video gaming in general. My partner at LightShed, Brandon Ross, has been very outspoken of the biggest growth vector coming out of the pandemic is obviously what's happened in video gaming. And it's been a huge tailwind to Epic and Roblox and all of these companies in the gaming space, especially ones that participate on the mobile end.

But I think for Netflix, the reality is, is they recognize the importance of gaming. They're not sitting around simply relying purely on entertainment. And I think they've correctly understood, they knew they had to move into original programming, they knew they had to go global, they knew they had to do global original programming, and now they're looking at OK, we have a base of 220 million subscribers. How do we give them more to do that will allow us to tap into more time spent and ultimately be able to drive price even further?

Like, that's why they're able to drive price up 11% in the US is that they have so much time spent on connected TVs. People can't live without Netflix. We can debate how fast they're going to grow, but people can't give it up. This is not a churn problem that Netflix is facing. And so I think gaming is a natural extension of that, is how do we capture more time per day?

And go back to your question about other companies, nobody else is entering gaming. You're not seeing any of these other streaming platforms push on gaming. And so I think this is a unique opportunity where Netflix is trying to get out ahead of everyone else yet again. They're so far ahead in original programming overseas. Now they're entering gaming. No one else is there. I think it's a pretty interesting opportunity to give people more to do on the platform and leverage their franchises, the content they're creating, and figure out how they make games that tie to that. I think it makes a tremendous amount of sense.

It's very early, but they talked about last night, how they are seeing good engagement across their user base with this content. And remember, Netflix on mobile was not a heavily used product. Everyone has Netflix on their phone, but it doesn't get used. Most Netflix viewing is on a big screen or a laptop. And so this is a way to meaningfully increase time spent on the most personal device in your life, the mobile phone, where video viewing happens, but long form viewing just doesn't happen as much. So I think it's a really interesting play by Netflix. But again, this is sort of, you're probably in the top of the first for their video game strategy.

JULIE HYMAN: Do they buy a publisher to speed things along?

RICH GREENFIELD: Well, they bought some, they bought a small publisher. I wouldn't be surprised to see them buy other small publishers. If you look at sort of the entertainment or the video content side of Netflix, they've never gone out and bought a big studio. They've basically went out and hired the best talent, which is something they're clearly doing on the gaming side. They're trying to hire great talent.

And then on top of that, they are certainly looking for smaller tuck-ins. Like they bought the Roald Dahl estate. Like you look at what they've done in video content, I think they're going to do the same thing on the gaming side, meaning lots of smaller tuck-in unique acquisitions, and then go out and just try to hire and invest in the best talent they can possibly get.

BRIAN SOZZI: Rich, I want to be--

RICH GREENFIELD: When you're spending $18, when you're spending $18 billion on content, to put 5% of that spend into gaming, that's a big number for the gaming space. But in the terms of the totality of Netflix's content spend, it's actually a relatively small number. So it's possible to invest in gaming in a pretty meaningful way as part of their overall spend.

BRIAN SOZZI: Rich, it wouldn't be a chat with you without something on AMC. Now what Netflix said on their call, perhaps there's a COVID hangover, perhaps people are getting more mobile again. Does the quarter off of suggest AMC might be a good buy here ahead of the spring and summer?

RICH GREENFIELD: I mean, I think AMC is in a very, very difficult position. I mean, I don't know if you've looked at box office numbers year to date, but I think last year obviously ended with the huge success of "Spider-Man," but box office was still down almost 30% in Q4. But what's scary and what should be panicking every investor who owns AMC stock is box office is down over 50% from 2020, from 2019, 2018.

The beginning of this year is just an absolute disaster. People are just, the movies that are coming out are not generating a lot of box office and people clearly are not showing up to theaters. And you're even seeing studios like Disney take their next big Pixar movie and send it directly to Disney+. And so the trend of companies avoiding the theaters is continuing. And you've got the CEO of AMC selling every vestige share he possibly has. And so I think it's a pretty clear sign that the movie theater business is not fixed.

If anything, you're seeing an increasing trend where a few movies a year will be huge. "Batman" in March will be huge for Warner Brothers. But very few films are going to require a visit to the movie theater. And so you're probably looking at in our top 20 for '22, we talked about our prediction of, we think box office this year is $8 and 1/2 to $9 billion compared to $11.3 billion in 2019. So that's a pretty dire forecast for box office and for AMC. So we would be continuing to sell AMC here.

JULIE HYMAN: Brian Sozzi just couldn't resist asking you about that one.

BRIAN SOZZI: Can't do it.

JULIE HYMAN: Rich Greenfield, partner and media and tech analyst at LightShed Partners. Rich, it is always really great to get your perspective on all of these issues. Appreciate your time, have a great weekend.