Numbers Game For Netflix: Subscriber Growth, Pace Of New Content, New Streaming Competition

Much of 2020 was a numbers game for Netflix Inc NFLX, which raked in an amazing amount of new subscribers as people waited out the pandemic in front of their big-screen TVs. These numbers return to focus Tuesday after the bell, when NFLX reports Q4 earnings.

No one wants to call anything a “winner” during a pandemic that has impacted so many lives and battered the business models of so many companies, but NFLX and other streaming services like it arguably became the “comfort foods” that many turned to.

After NFLX added more than 28.3 million new subscribers to an already hefty base in the first three quarters of 2020, analysts are anxious to hear how the streaming giant ended the year from a subscriber standpoint. NFLX executives have been warning all along that subscribers added in the first half of 2020 represented an unsustainable pull-forward of the quarantined masses. How could anyone expect the streaming video veteran to continue bringing in new subscribers to the tune of 16 million in Q1 and 10.1 million in Q2 on a regular basis?

Certainly not NFLX execs, as was confirmed in Q3 when a relatively small 2.2 million added their names to the NFLX subscriber list. So many other would-be subscribers were said to be spending their summers outdoors as—wrongly, it turns out—it appeared the contagion was getting under control.

As some cities pulled in the reins again in Q4, did NFLX see another subscriber surge? During the Q3 conference call, Chief Executive Reed Hastings predicted the year would end with more than 200 million members on the rolls.

“Next time we get together,” he said on the pre-recorded Q3 conference call, “we should be over 200 million members...we’ve got an amazing content technology and marketing engine humming,” he added. “So really looking forward to next year.”

Many analysts appear to be too, considering how many have reiterated their “buy” ratings on the stock ahead of earnings.

Since bottoming in March, NFLX stock is up nearly 70%—and that includes the 6% it’s lost since the beginning of 2021.

FIGURE 1: UPSTREAMING. Shares of Netflix (NFLX—candlestick) handily outpaced the benchmark S&P 500 Index (SPX—purple line in 2020). Can it keep its mojo in 2021 amid increasing competition? Data sources: Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Priming The Pump

Talk about breaking the mold: Only a week ahead of its earnings release, NFLX went against its typical low-key rules and released a fast-paced trailer with three super Hollywood stars unveiling its 70-movie slate for 2021.

In a rapid, engrossing video hosted by Ryan Reynolds, Gal Gadot and Dwayne Johnson, the streaming video giant—the industry’s largest and still growing—rolled out short-clip previews of a wide array of movies that will feature such big-name Hollywood stars as Lin-Manuel Miranda, Leonardo DiCaprio, Halle Berry, Jennifer Lawrence, Amy Adams, Benedict Cumberbatch and Idris Elba, among other star-studded actors for this year.

At 70, that’s a new movie—and then some—per week. In short, it underscored what The New York Times called “a reminder of its power in a Hollywood that has been irrevocably changed during the pandemic.”

That might be pushing the envelope, but it appears to give credence to the role streaming video powerhouses like NFLX, Disney+ DIS, Amazon.com, Inc’s AMZN Prime Video and other streamers are taking on as movie theaters lose their mojo. Original programming looks to be going a long way into the TV rooms of many U.S. households.

A Breaking Point?

One of NFLX’s challenges with so much content is that it overwhelms subscribers, according to analysts. With so many choices and so many you’ve-got-to-see-this recommendations, besieged subscribers don’t know where to turn and sometimes choose something else altogether.

Or as Jeff Loucks, executive director at Deloitte, said in a recent cord-cutting study: “Since the COVID-19 pandemic began, streaming services have attracted more subscribers than ever. The biggest challenge for providers will likely be to retain customers once their series is over and the full price kicks in.”

NFLX brought out Netflix Direct to meet the challenge. In November, NFLX started testing it in France as a means of making the choices for subscribers through a more linear programming version, akin to the traditional network TV channel experience. It’s a #StopTheScroll concept Vulture.com said could help NFLX retain viewers who might get lost in the glut of content by giving them regular programming day-to-day that algorithms determine might be of interest to them. Yes, it’s a throwback but sometimes nostalgia is good and analysts said they want to know how good.

Speaking Of Numbers        

In Q4, NFLX hiked prices in the U.S., Canada and Ireland, and, after the quarter ended, in the U.K.. Some analysts expect widespread pricing increases again in 2021.

“Netflix always characterizes (its) approach to price as seeking to earn the right to raise price by earning engagement from their members, and always seeking to make sure the value perceived by members far exceeds the price they are asked to pay,” Bernstein analyst Todd Juenger said in a note to clients this week. “On that basis, it’s hard to argue that Netflix hasn’t earned the right to raise prices by $1/$2.”

It’s unlikely NFLX execs will talk about that on the pre-recorded call, but analysts said they will be parsing all comments for any insight into pricing ahead. Higher prices typically lead to higher churn as subscribers lose their enthusiasm on the value quotient. At the same time, however, it could still lead to better revenues.

The Marketing Measure

NFLX has long been known to throw the spaghetti against the wall as it tries out ways to lure viewers in and keep them interested. The latest is a big tweak to the “most viewed list,” which could be considered the equivalent of the candy dish at your grandmother’s house: Whenever you’re there, you always go back to see what’s in it that you might want to try next.

Analysts are talking about how NFLX execs have said they plan to expand the list to 50 entries from the original 10 and want to know more. What else is on the boards to limit churn as prices climb?

Closer To Free Cash Flow?

Reed noted free cash flow on the call, and Chief Financial Officer Spencer Neumann wasn’t shy when talking about the potential $2 billion in free cash flow over 2020 and how it’s tracking toward improved profitability and a reduction in content spend.

Here’s what he said on the call: “We’re not yet sustainably free cash-flow positive or ready to call that, but we’re rapidly closing in, and then, say, given the more than $8 billion of cash on the balance sheet, we are at a point where at least—you could probably pretty safely say—we can self-finance our growth without needing to access the capital markets. But we’re still, obviously based on our guidance, probably a couple of years away, at least from sustainably being free cash flow positive.”

“Self-finance our growth…” That could be a biggie—it’s the challenge faced by many of today’s so-called “disruptors” who, at some point, must rely less on narrative and more on profitability.    

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