Netflix experiencing a ‘reset in expectations,’ analyst says

Raymond James Internet and Digital Media Analyst Andrew Marok joins Yahoo Finance Live to discuss Netflix's demand and subscriber growth outlooks, streaming services scaling for competition, and pricing through the equity of series and franchise prospects.

Video transcript

AKIKO FUJITA: But we do begin this hour yet again with the slide we are seeing from Netflix. Brad, we highlighted this in the last hour, down more than 20% right now, hitting a new 52-week low, all on the back of those concerns about slowing subscriber growth.

Why don't we bring in our first guest for the hour here? We've got Andrew Marok, Raymond James internet and digital media analyst. Andrew, in the last hour, we spoke to an analyst who said that he has been questioning the concerns or raised concerns about Netflix. But you have maintained a market perform rating. You think the selloff we're seeing today is a bit overdone?

ANDREW MAROK: Hi. Thank you for having me today. I would say that the reaction that we're seeing in Netflix's shares is appropriate, given what we think is kind of a reset in expectations for the pace of subscriber growth, post the pandemic. I think bullish arguments would have had you believe that maybe we get back to that mid to high 20s million per year trajectory that we saw in 2018-2019, prior to the upheaval of the pandemic.

Since then, I think the 1Q guidance of 2 and 1/2 million subscribers kind of takes that off the table for 2022. And so I think the question will remain, what does normalized demand for Netflix look like as we get past the pandemic? And I think it's actually relatively well below those mid to high 20 million figures. We're at, I think, 19 million for 2022.

BRAD SMITH: And particularly, as you mentioned your targets and what you're looking for, your note has about 19 million, as you were mentioning, 19.6 million even going into 2023. And so with that in mind and kind of factoring in what Netflix has already said and forecast at this point, what type of spending do you anticipate that would take place, knowing that this is still a company that's heavily reliant on the titles being popular in many different regions of the world as well?

ANDREW MAROK: Absolutely. Especially from a subscriber acquisition point of view, which is what Netflix kind of pointed out as one of the weaker areas of their subscriber dynamic. Churn and retention were actually relatively strong. But the subscriber acquisition is the question. And that does really boil down to, can they keep providing that high-level, blockbuster, headline-driving content in order to entice subscribers to join the subscription service?

They were about $17 billion in cash content spend in 2021. We have that increasing to about $18 billion in '22 and increasing at a growth rate slightly lower than revenue beyond. We think they're going to continue to spend on content because it is that engine, that driver for subscriber growth and interest.

AKIKO FUJITA: How much of the slowdown that we're seeing right now is about competition? Reed Hastings did address that, but he seemed to say it's more about the COVID noise than the competition that's leading to the slowdown that we're seeing.

ANDREW MAROK: So this was the first time that we can recall that, even on a marginal basis, the company cited competing streaming services as an avenue of competition. In the past, it's mostly been focused on things like video games, other forms of digital media. But I think that, as we've started to see the direct-to-consumer services start to really scale up, whether that's Disney+, Peacock, Paramount+, these are companies with very large libraries of content and who are also starting to really turn the content investment flywheel in ways that we haven't really seen, especially prior to the pandemic.

So I think as these competing services scale, it's going to create a very competitive market for your streaming video dollar. And it kind of erodes the value proposition of cord-cutting. Whereas in the past, you could cord-cut, subscribe to one service, and come out well below a cable subscription, now you're typically having to subscribe to multiple services. And that cost advantage is no longer as great.

BRAD SMITH: So absent the major superhero titles that some of their competition has, absent the regional sports networks or sports overall or unscripted, which they're looking at addressing even more so in this most recent earnings call and report, where does that pricing power, as we're looking at the competition and that competitive landscape and the pricing power-- that has Netflix sitting above the rest of the competition in the fold right now that we're displaying.

And so does that pricing power begin to wither if you don't have the superhero or the sports or some of the unscripted content?

ANDREW MAROK: Yeah. I think the stock reaction today and maybe some of the weaker subscriber guidance is overshadowing a little bit the strength of Netflix's content. Netflix still drives zeitgeist-style content. We were talking about "Squid Game." It's the only thing we could talk about in the months of September and October. And then you bolster it with other franchises like "You," "The Witcher," "Bridgerton," which will be launching a season two in late 1Q.

They may not be sports. They may not be superhero movies or series. But they are headline-driving, conversation-driving types of content that people want to be included in those conversations and will subscribe to Netflix to be a part of. That being said, they're not really the only game in town anymore.

AKIKO FUJITA: Andrew Marok, Raymond James internet and digital media analyst, appreciate you stopping by today.