Ignition Dimension (ID: chaintruth) original
Produced by Burning Finance
Author | Feng Xiaoting Kong Yuexin
Edit | Rao Xiafei
After eating the traffic dividend of "Squid Game", after the release of the latest financial report data, the secondary market reacted violently to it, and investors questioned it.
After the U.S. stock market on January 20, 2022, video streaming giant NFLX.US announced its financial results for the fourth quarter of 2021 and 2021.
According to the financial report, Netflix achieved revenue of $7.709 billion and net profit of $607 million in the fourth quarter of 2021, of which the operating profit was $632 million, down 34% year-on-year, for which Netflix said that "given the large amount of content in the fourth quarter of 2021, the decline in operating margin is expected."
Regarding Netflix's key indicator "new global subscribers", according to the financial report data, the number of global subscribers increased by 8.3 million in the fourth quarter of 2021, slightly lower than Netflix's expected guidance of 8.5 million. At the same time, Netflix also gave its expectations for the first quarter of 2022, which is expected to add 2.5 million new users, significantly lower than the analysts' expectation of 6.26 million new users, which is also lower than the data for the same period in 2018-2021.
Source/Netflix earnings report
This "conservative" value surprised the market. As soon as the financial report was disclosed, the secondary market also gave negative feedback on this, Netflix plunged 20% after hours on the same day, and the closing price on January 21, 2022, Eastern Time, further fell below $400 / share.
The 20% drop in trading volatility after hours is not new for Netflix, which has plummeted by 40% from a recent peak of $700.99 per share in less than Three months since November 2021. During the period, Netflix was interpreted as "bearish" news by the outside world due to its own price increases, fierce competitors and many other reasons.
As a technology darling on Wall Street, Netflix is once a member of FAANG, and it is on a par with Internet giants such as Facebook, Apple, Amazon, and Google, and the attention it receives is self-evident. But Netflix is also facing fierce competition and foreseeable difficulties, although in the first quarter of 2021 financial report, Netflix also said that "do not think that the competition of Disney+, HBO Max and other companies is the reason for the weak number of subscribers", but this does not affect the streaming media platforms such as Disney+ and HBO Max.
The pressure on Netflix is obvious. Disney first stated on Investor Day in May 2021 that "Disney will spend up to $9 billion a year on Disney+ content investment by 2024," and then in November of the same year, Disney's CEO reiterated the company's goal of "230 million to 260 million Disney streaming users by 2024."
In the face of menacing competitors, Netflix has also taken countermeasures such as price increases and increased content investment, but combined with the feedback from the secondary market, investors are not satisfied with Netflix's performance in the fourth quarter of 2021, and their attitude towards Netflix is far less than that in the third quarter of 2021. You know, after the big hit of "Squid Game" was broadcast in the third quarter of 2021, in addition to promoting the increase in Netflix's stock price by more than 10%, it also brought super high returns to Netflix. According to Bloomberg, the production cost of "Squid Games" is only $21.4 million, equivalent to $2.4 million per episode, while Netflix internally estimates that "Squid Games" will bring more than 40 times the cost value, about $891 million.
Overall, in 2021, Netflix's content has achieved good results. According to the financial report data, Netflix accounted for 6 of the list of "the 10 most searched TV series in the world", while Netflix accounted for 2 of the same "Top 10 Movie List". But in terms of popularity and influence, other TV series and movies on the list are not as good as the #1 squid Game.
However, video content is cyclical, so the production of high-quality video content and market performance are not synchronized. In the view of Zhao Hongmin, a content creator and technology Internet analyst, in the past few years, Netflix has invested heavily in content and has seen returns. Today, it can be understood that the previous return on investment is exhausted. The financial report announced that Netflix will continue to increase its content investment, and it can also be expected that there will still be better market performance in the future. "Quality content can always attract more users, as long as Netflix can maintain continuous content elaboration, it will not worry about user growth peaking."
A "Squid Game" has brought considerable benefits to Netflix, further verifying the "content is king" logic, and Netflix, which only relies on user subscription payment income, is well aware of the importance of "content".
However, the explosive model can not be sought, and the Netflix after the explosion has also fallen into a growth dilemma, at the same time, this dilemma is also a dilemma in the long video industry.
After the "squid", Netflix fell into trouble
Combined with Netflix's 2021 annual financial report data, Netflix's performance is not bad, and it has increased compared with the 2020 data.
According to the 2021 performance data, Netflix's 2021 revenue increased by 19% from 2020's revenue of $24.996 billion to $29.698 billion, and its net profit was $5.116 billion, up from $2.761 billion in the previous year; and the diluted earnings per share were $11.24, also higher than the previous year's $6.08.
Even if you take Netflix's data for the fourth quarter of 2021 alone, it is also remarkable. According to the financial report, Netflix achieved revenue of $7.709 billion in the fourth quarter of 2021, an increase of 16% year-on-year, slightly lower than wall Street's $7.71 billion revenue forecast; net profit of $607 million, an increase of 12% compared with $542 million in the same period last year, in line with Wall Street expectations; and realized earnings per share of $1.33, higher than wall Street's expected earnings per share of $0.82.
But even so, Netflix's performance in the fourth quarter of 2021 is inevitably eclipsed compared with the performance of the third quarter of 2021, which has the support of the phenomenon of "Squid Games". And in the earnings report, Netflix changed its statement at the beginning of 2021 that "I don't think competition from other companies has a substantial impact on the company's growth" to "as entertainment companies around the world develop their own streaming media products, competition has intensified in the past 24 months, and this increased competition may affect our marginal growth."
If the strong user growth recorded in 2020 is attributed to the epidemic dividend, then the unexpected development of Netflix in the third quarter of 2021 is due to the big hit of "Squid Game". With the gradual and effective control of the epidemic, the epidemic dividend has undoubtedly disappeared, and the user growth has been in a sluggish state since 2021, and the popularity of "Squid Game" has also brought considerable revenue of $0.82 to Netflix.
As Netflix said in its third quarter 2021 earnings report, "Squid Games was released on September 17 and has become our most successful TV show ever" With the popularity of "Squid Game", Netflix also set a record high of $700.99 / share in november 2021, but the good times were not long, and after hitting a record high, Netflix turned around and entered a continuous downward channel, and the stock price has now fallen below $400 / share.
At the same time, the growth rate of "new subscribers" directly linked to Netflix's revenue generation is also slowing down, and in order to stabilize the growth rate of revenue, Netflix has set its sights on "subscription prices". The data shows that Netflix has adjusted its fees in the United States, Japan, South Korea and other regions since 2020.
Netflix's most recent price increase occurred last week in Canada and the United States, where Netflix has the largest user base. In this regard, JPMorgan Chase analyst Doug Anmuth believes that the price increase will significantly increase the company's revenue. "Every time the subscription price rises, it may bring more friction, but it can be seen that Netflix is willing to lose a small number of users in exchange for an increase in revenue, and historical data shows that most of them may still return to the Netflix platform in the future," he said. ”
Whether the fact is as the above analysts said, the price increase has little impact on Netflix, and even whether it will significantly increase the company's revenue is not known, but it is true that investors are not satisfied with the financial results of the fourth quarter of 2021 and 2021 announced by Netflix.
Growth peaked and inner volume accelerated
The 20% plunge in the stock price is the most direct manifestation of investor dissatisfaction with Netflix's performance, and it is also a doubt about Netflix's future.
Zhao Hongmin told Burning Finance: "Netflix's stock price after a substantial increase some time ago, in advance of the overdraft of investors' investment expectations, this time the decline in individual user data, so that the industry to see Netflix growth peaked, the expectation value naturally declined; in addition, many investors also took advantage of this to return to the capital." "In turn, it led to a chain reaction such as the decline in stock prices."
All along, Netflix's signal to the outside world has two points: one is that Netflix has cultivated the user's payment habits in the long-term operation process, and the other is that Netflix has high-quality content as a moat.
From the data disclosed by Netflix, it can also be seen that the effect of high-quality content attracting users is remarkable. Driven by the global blockbuster "Squid Game", the third quarter of 2021 financial report shows that Netflix's global paid users increased by 4.38 million, 26% more paid users than previously expected, and 100% more than the new number in the same period last year.
However, from the perspective of annual growth, the growth rate of user volume in 2021 is less than the average of the past 4 years. From 2018 to 2020, Netflix's annual net growth in paying users exceeded 25 million, and in 2020, it reached 37 million, but the net increase in 2021 was only 18 million.
The intensification of competition from other companies has become the most important reason for the slowdown in the company's growth rate, on this basis, Netflix has only set a performance guidance of 2.5 million for the number of new users in the first quarter of 2022, which is not only significantly lower than the 6.26 million new additions given by analysts, but also lower than the 4 million in the same period of 2021, which all shows that the users who are the sales guarantee of Netflix's works have touched the growth ceiling.
In order to maintain the content moat, Netflix has put a "blood book" on content production. According to the financial report data, Netflix spent $17.7 billion on content in 2021, a significant increase from $11.8 billion in 2020. Some media predict that in 2022, this number is bound to go up to a higher level.
In terms of the effect of increasing content investment, to quote Netflix, "We have made some big achievements in the fourth quarter." According to Wedbush Securities, Netflix released a new season of 157 movies, new episodes and existing episodes in Q4 2021, a 20% increase in the number of original content released over the same period last year.
Among them, the original drama "Maid" and the return drama "Demon Hunter", "You", and "Emily in Paris" have received great attention. In terms of movies, "Red Notice" and "Don't Look Up", which were released in the fourth quarter of 2021, have become the most popular films in Netflix's history.
However, the competitive pressure of long video is visible to the naked eye, with apple, Disney, AT&T, Amazon and other giants pouring into the streaming media track, and the peak of user growth, the competition in the global streaming media industry is becoming more and more fierce, and major platforms have begun an "arms race" in content, and the cost of content production has also risen.
In Zhao Hongmin's view, the accelerated "inner volume" of streaming media platforms in content investment may improve the quality of content on the one hand and provide users with more high-quality content; on the other hand, it may simply push up the price of content production and purchase, and the final result is that users still have to pay. In addition, the increase in self-made content will gradually lead to the monopoly of the entire film and television content industry chain by the platform.
What is the future of long video?
Before there was iQiyi's stock price "waist cut", and then there was a "plummeting" Netflix stock price, which means to a certain extent, some investors no longer believe in the "growth story" of the long video business.
The underlying logic of the streaming platform is to continuously provide high-quality explosive content to attract members to subscribe and pay. Of course, the three major domestic long video platforms also include the income of brand advertising.
However, this has also become a common problem for current streaming media platforms. High-quality content is often available, but explosive models can not be sought. "Squid Games" did drive membership growth during the broadcast, however, after the broadcast, the growth rate of members decreased significantly. This also reflects that if the streaming media platform wants to achieve "sustained growth" in membership scale, it needs to continuously and intensively create explosive dramas. Don't say that aiyouteng three major platforms, even if Netflix has a rich supply of high-quality content, it cannot ensure the high-density launch of blockbuster dramas.
The uncertainty of the output of the blockbuster and the self-made inner volume of the platform will make it difficult for users to have a high degree of stickiness to a single platform, and the growth of the streaming media platform will be difficult to sustain in the case of slowing user growth.
Moreover, unlike the domestic "multi-polar pattern", in the US long video market, it is presented as a situation of "one super and many strong", "one super" refers to Netflix, and "how strong" is Disney+, Amazon Prime, Apple TV+, HBO Max and so on. Media analyst Michael Nathanson said in a research note: "2022 should prove that no company has a monopoly on high-quality content, and the time spent on any video-on-demand platform is not guaranteed." ”
In addition, the short video platform erodes the user's use time, which is also a dilemma that domestic and foreign streaming media platforms have to face. In its shareholder open letter released with its second-quarter earnings report last year, Netflix mentioned TikTok for the first time and saw it as a competitor that needed to be taken seriously. Domestic long video platforms also have to face the competition of short video platforms in advertising.
Not only Netflix, but many streaming platforms are looking for new growth.
For Netflix, which is mainly based on membership subscriptions, the most common and best way to increase revenue is to increase prices. Last week, Netflix raised subscription fees in the U.S. and Canada. However, in Zhao Hongmin's view, the key to adjusting membership fees on video platforms and user acceptance lies in whether the quantity and quality of content have improved after the price increase. The price increase of Netflix did not see the corresponding improvement in user experience, but only simply increased the membership fee, then it can be understood as drinking and quenching thirst, exhausting and fishing, and in the long run, users will be lost.
Therefore, Netflix is also trying to diversify its content services to raise the ceiling of membership payments.
Netflix's gaming business is taking on this task, and it is conducted cautiously and with restraint. In November 2021, Netflix launched a mobile gaming experience and launched five mobile games, including Stranger Things 3: Games. The earnings report shows that by 2022, Netflix will expand its casual and core game genres. It can be seen that Netflix is trying to build its own ecosystem and further tap the growth space of content. Although it is necessary to face competition from major game companies at home and abroad at the level of game production and promotion, it is expected to become a natural thing to improve the added value of content and increase the price of members.
Another way is to go to sea, which is the path that most streaming media platforms are trying at present, and Netflix has opened the international market layout early.
According to the fourth quarter financial report, the number of new users in Netflix's United States and Canada region was 1.2 million, and the number of new international users was 7.1 million, which shows that for Netflix, international growth is the highlight. Since 2016, Netflix has targeted the creation of localized content in Latin America, Asia-Pacific and other places, the most successful representative of which is the globally popular Korean film and television drama "Squid Game".
As one of Netflix's major overseas markets, as of March 2021, Netflix has invested a total of 770 billion won (about 4.2 billion yuan) in Korean content resources. Previously, Netflix also bought "Itaewon Class" and invested in the production of popular dramas such as "The Forced Landing of Love" and "Kingdom". According to the list of films to be broadcast by Netflix, 22 Korean dramas, including "The House of Paper Money", are about to be launched.
Netflix's localization layout has also become a learning target for many streaming platforms, and Disney recently announced that it has set up an international content group to expand its streaming services in different markets.
But at present, the task of "Netflix" is to continue to create high-quality content and achieve user growth in order to continue their "business story".
Resources:
"Wool, Holding Traffic? Ten years burned out hundreds of billions! Why can't Aiyouteng become Netflix? Source: IC Labs
"After hours plunged nearly 20%! Q4 without the big hit, Netflix is a bit miserable", source: Real Detective AlphaSeeker
*The title image is from Burning Finance, and the inner text illustration is from Visual China.
*Disclaimer: In no event shall the information herein or the opinions expressed herein constitute investment advice to any person.