The globally popular Squid Game failed to win a bright future for NFLX.US, the world's largest streaming listed company.
Netflix's latest Q4 2021 results show a net increase of 8.28 million quarterly paying subscribers, down 2.7% from the same period last year. Quarterly revenue increased 16.03% year-over-year to $7,709 million.
To produce a good program, content production expenditure naturally can not be saved, in its new TV series acclaimed and popular at the same time, the gross profit margin also fell significantly, quarterly gross margin fell by 5.27 percentage points year-on-year to 32.04%, coupled with the increase in marketing expenditure and development costs, the after-tax profit in the fourth quarter only increased by 12.04% year-on-year to $607 million, significantly lower than the third quarter of $1.449 billion.
So, despite a year-over-year increase in operating income of 18.81% year-on-year to $29.698 billion and net profit surging 85.28% to $5.116 billion, Netflix's share price fell by more than 20% in a single day after the announcement due to poor fourth-quarter performance, a significant slowdown in the growth rate of paying subscribers, and a wave of money for technology stocks based on the expected us interest rate hike.
Is Netflix okay?
Have paid subscribers peaked?
Netflix's revenue comes mainly from paying users, so its core strategy is to maximize the size of global streaming media membership while maintaining operating margin targets. This is also why the market's concerns about the slowdown in the growth of its paid subscribers have been infinitely magnified, which means that its future revenue and earnings growth will slow. The question is, have paid subscribers really peaked?
Founded in 1997, Netflix pioneered the online DVD rental service in 1999, that is, users select the shows they want to watch on their websites, and then make reservations, Netflix then delivers the DVD to the user by mail, and the user returns the DVD through Netflix's prepaid mail service after reading it.
By the end of 2007, Netflix had 7.5 million U.S. users and was the largest provider of online movie rental services in the United States. But at that time, there were already many competitors in the market, including similar online movie rental service providers, Apple's iTune, Hulu Plus, etc., coupled with the rapid development of the Internet and the DVD model giving way to higher-definition versions (such as Blu-ray, etc.), making Netflix anxious about the future.
Times are changing, and Netflix can only change. In January 2007, Netflix introduced a new feature that allowed users to instantly watch movies and TV series on their computers, which was also the beginning of the streaming service.
In September 2010, Netflix expanded to Canada, in 2011 to the Latin American market, from 2012 to 2014, it launched operations in many European countries, and since 2015, it has completed its layout in the Asia-Pacific region and other regions.
It is worth noting that this does not include the mainland market, and so far, Netflix has not been able to enter the Chinese mainland market.
By the end of 2021, Netflix's global streaming paid membership will be 222 million, with the four major regions of the United States and Canada, Europe, the Middle East and Africa (EMEA), Latin America and Asia Pacific accounting for 33.9%, 33.4%, 18% and 14.7% respectively.
See the figure below, Netflix in the past decade of global paid membership have shown positive growth, the increase in 2020 significantly expanded, the author believes that the epidemic lockdown is the main reason, so that residents stay at home time greatly extended, triggered a surge in demand for Netflix products, so after the epidemic, home isolation is relatively reduced, in advance overdraft growth of the high base, the net increase in membership decreased very normally.
Looking at the distribution of paid members, see the figure below, the global layout of 2016 has become a prototype, since 2017, the scale of paid users in Netflix North America has been roughly flat, the overall growth is mainly from the EMEA region and Latin America, from 2020, Netflix has reduced prices to expand the Asia-Pacific market (especially India), and the user growth rate in the region has expanded significantly.
Looking at the following membership growth chart, affected by the epidemic in 2020, the growth rate of the four regional markets is very strong, especially in North America and EMEA, and by 2021, the growth rate of the North American market has shrunk significantly, while EMEA and Asia Pacific are still the most important growth markets for Netflix.
In addition, as mentioned earlier, Netflix has not entered the mainland market. According to Tencent (00700. HK), Tencent Video's paid video membership at the end of September 2021 was 129 million, equivalent to 58% of Netflix's global paid membership at the end of 2021. It is conceivable that the paid market still has a very large space for expansion, only whether Netflix can win users in these markets.
Asia Pacific should be Netflix's most promising expansion market in the future. As can be seen from the chart below, it can be seen that the inverse relationship between the paid membership fee and the net increase in the Asia-Pacific market is more significant, that is, the user's price sensitivity is higher, and when the fee increases, the net increase in membership decreases, and conversely, the fee is reduced, and the net increase in the scale of the paid membership increases. Leaving aside the unlimited potential of the domestic market, from the perspective of Netflix's price reduction and the growth of user scale in the Asia-Pacific region, it is feasible to promote the growth of user scale through price adjustment.
In the guidance for the first quarter of 2022, management expected a net increase of 2.5 million paid members, well below the 4 million in the same period last year, which raised doubts in the market.
But in fact, the company still believes that it can achieve healthy growth in performance, and the forecast data is low because some popular dramas, such as Netflix's most popular TV series "Bridgeton Season 2" and the original movie "Adam Plan" will be launched until March, which may prompt users to delay the payment plan.
It can be seen that the contraction of Netflix paid membership is not the biggest problem it faces, because the expandable space of paid members is still very large, and it can still adjust the increase or decrease through the price. So what is Netflix's biggest problem? Is the future can not maintain this bargaining power - content competitiveness.
Lowering your operating margin target?
Netflix's latest quarter results also gave a target operating margin of 19%-20%, well below the 27.36% in the first quarter of 2021, and the company explained that the lower margin may be due to the negative impact of the appreciation of the US dollar (the company expects its 2022 revenue to decrease by US$1 billion if the US dollar appreciates in the past six months).
Netflix has only separated the performance of its streaming business from its DVD business since July 2011. Since 2012, the revenue growth of the streaming media business has entered the fast lane, which has also led to the rapid growth of Netflix's revenue. With the expansion of revenue scale, the operating profit margin of the streaming media business has also gradually improved, far away from its original DVD business, reaching a level of 20.86% in 2021, see the chart below.
It is worth noting that Netflix's operating margin in the first three quarters of 2021 was very satisfactory, reaching 27.36%, 25.17% and 23.45% respectively, but in the fourth quarter, it suddenly fell to 8.20%, 6.16 percentage points lower than the same period last year, mainly due to the decline in gross margin and the increase in the proportion of marketing expenses in revenue.
Netflix's operating costs mainly include amortization of its production content costs. The author believes that Netflix has launched popular dramas in the second half of 2021, such as the launch of "Squid Game" in Season 3, and the launch of new seasons such as "Demon Hunter" and "You" in Season 4, resulting in a significant increase in amortization of its content costs, which is the main reason for dragging down gross margin performance and driving marketing expenses.
As the rise in costs and expenses stabilizes, the positive impact of the extended stay-at-home time of the epidemic in 2020 gradually fades, and the performance is normalized, and Netflix's profit performance should stabilize.
The company still maintains its goal of improving operating margin by an average of 3 percentage points per year, which shows that it has not changed its overall outlook. Before the results were announced, Netflix's North American packages generally increased in price, or passed on costs.
It is worth noting that the north American subscriber growth rate fluctuates greatly, some quarters even have negative growth, see the following figure, it can be seen that the saturation is quite large, its future user growth should mainly rely on EMEA region and emerging country markets, such as the Asia-Pacific region, and in order to expand these emerging markets, Netflix does not hesitate to reduce prices to sell, so if the North American price increase caused by the loss of members is less than the new member benefits brought about by emerging market price cuts, it is not impossible to maintain operating margins.
Entered the game industry
In the third quarter of 2021, Netflix acquired video game developer Night School Studio and entered the game development field. Night School Studio has five games, the most famous of which is Oxenfree (Chinese translated as Wolf Rush).
In November 2021, Netflix launched the mobile game experience for the first time on Android and iOS, and users can play games on the Netflix mobile app.
Since then, Netflix has added five more games in the second half of the year, and the total number of games in 2021 has reached 10.
Netflix mentioned that the game will be included in the user's subscription fee, with no ads or in-app purchase fees, so its current games are only to please the user, and have not been monetized.
It will take time to prove whether the gaming business can become a new growth engine.
summary
The high base in 2020 should be the main reason for the decline in its paid membership growth, and the contraction in the profit margin in the fourth quarter may be related to the sharp increase in the cost of new drama launches.
But in terms of content, Netflix will continue to launch attractive episodes and shows in the foreseeable future, and the expansion of the game business should help it retain paying customers, so the truth may not be as pessimistic as the market thinks.
Of course, the competition from other content providers can not be ignored, including content offensives from Disney and Amazon, etc. Netflix to remain competitive, I am afraid that it will have to work hard to increase spending, which may weigh on its profit margins.
That being the case, does a falling stock price provide an opportunity to bottom out? Not necessarily.
The author believes that the stock price fell after the Netflix performance, or in line with the recent tightening of the prospect of funds to make the US stock market pullback, after repeated new highs, the valuation of the US stock market has been at a considerable level, the recent tightening of funds in Western countries will make these high markets under pressure.
Because Netflix's performance is slightly lower than expected, this gives a reason for the profit of funds, after all, in 2020 and 2021, Netflix has risen by more than 77.6%, and now it is not going to wait for when. With the tightening of funds, its valuation will continue to adjust, but the fundamentals of Netflix have not changed significantly, and the market has long anticipated the bad news of Netflix, and now it is just taking advantage of the situation to escape.
Author: Mao Ting