Netflix (NASDAQ: NFLX) is an American streaming service. The company’s platform shows movies and TV series, both Netflix itself and others’ licensed content. It is the largest company of its kind in the world.
On January 19, the company released a new report. The number of subscribers of the company exceeded 200 million people, but profits in the last quarter were lower than in the same period of 2019. Overall in 2020, both revenue and profit of the company increased markedly due to quarantine restrictions.
But Netflix’s competitors do not doze off and build up their market share, and in some perspectives, they already surpass the service – and this, apparently, is not built into the share price by investors in any way.
What’s going on here
Readers have long asked us to start parsing the reporting and business fundamentals of U.S. issuers. Suggest in the comments the companies whose analysis you would like to read.
Often when reporting companies, numbers are rounded, so the totals in the charts and tables may not add up.
What they make money on
I would like to note that markets outside of the U.S. are playing an increasingly prominent role in the company’s reporting, already accounting for more than half of the company’s revenue. Other countries account for the most growth among subscribers, and this is a notable advantage for Netflix – it is a company with a presence in 190 countries. Netflix’s main competitors have not yet come close to the same numbers: Disney+ is available in 30 countries, and HBO Max is only available in the U.S. Apple TV+ – available in 107 countries – and Amazon Prime Video – 200 countries and territories – are more successful, but there is not much original content on their services, although there are gems like “Protecting Jacob” and “Too Old to Die Young.”
Last quarter, Netflix saw a 21.52% increase in revenue compared to the same period in 2019, but profits fell by 7.63%. On the other hand, in 2020, everything is much better than it was in 2019: profits rose by almost 48%.
The company’s management also made it clear that it planned to spend the money freed up to buy back shares. But given that the company’s capitalization is now a quarter of a trillion dollars, the effect of these sums will probably not be very large.
| Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | |
| Revenue | 2672 | 2703 | 2840 | 2933 | 2980 |
| Paid subscribers | 67,66 | 69,97 | 72,90 | 73,08 | 73,94 |
| Clean new subscribers | 0,55 | 2,31 | 2,94 | 0,18 | 0,86 |
| Average revenue per subscriber, dollars | 13,22 | 13,09 | 13,25 | 13,40 | 13,51 |
| Year-on-year growth in percent | 17% | 14% | 6% | 2% | 2% |
| Average revenue growth as a percentage year-on-year without taking into account currency revaluation | 17% | 14% | 6% | 3% | 2% |
| Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | |
| Revenue | 1563 | 1723 | 1893 | 2019 | 2137 |
| Paid subscribers | 51,78 | 58,73 | 61,48 | 62,24 | 66,70 |
| Clean new subscribers | 4,42 | 6,96 | 2,75 | 0,76 | 4,46 |
| Average revenue per subscriber, dollars | 10,51 | 10,40 | 10,50 | 10,88 | 11,05 |
| Year-on-year growth in percent | 3% | 2% | 4% | 5% | 5% |
| Average revenue growth as a percentage year-on-year without taking into account currency revaluation | 7% | 4% | 8% | 3% | – — |
| Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | |
| Revenue | 746 | 793 | 785 | 789 | 789 |
| Paid subscribers | 31,42 | 34,32 | 36,07 | 36,32 | 37,54 |
| Clean new subscribers | 2,04 | 2,90 | 1,75 | 0,26 | 1,21 |
| Average revenue per subscriber, dollars | 8,18 | 8,05 | 7,44 | 7,27 | 7,12 |
| Year-on-year growth in percent | 9% | 3% | −9% | −16% | −13% |
| Average revenue growth as a percentage year-on-year without taking into account currency revaluation | 18% | 12% | 13% | 5% | 4% |
| Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | |
| Revenue | 418 | 484 | 569 | 635 | 685 |
| Paid subscribers | 16,23 | 19,84 | 22,49 | 23,50 | 25,49 |
| Clean new subscribers | 1,75 | 3,60 | 2,66 | 1,01 | 1,99 |
| Average revenue per subscriber, dollars | 9,07 | 8,94 | 8,96 | 9,20 | 9,32 |
Source: Company report, p. 7 (11)
| October – December 2020 | June – September 2020 | October – December 2019 | |
| Revenue | 6 644 442 | 6 435 637 | 5 467 434 |
| Cost of revenue | −4 165 160 | −3 867 751 | −3 466 023 |
| Marketing | −762 565 | −527 597 | −878 937 |
| Technologies and developments | −486 936 | −453 802 | −409 376 |
| General and administrative expenses | −275 539 | −271 624 | −254 586 |
| Operating income | 954 242 | 1 314 863 | 458 512 |
| Interest payments | −197 186 | −197 079 | −177 801 |
| Interest income or expense | −250 639 | −256 324 | −131 378 |
| Profit before tax | 506 417 | 861 460 | 149 333 |
| Amount of taxes payable or tax deduction | 35 739 | −71 484 | 437 637 |
| Total profit | 542 156 | 789 976 | 586 970 |
| Basic earnings per share | 1,23 | 1,79 | 1,34 |
| Diluted earnings per share | 1,19 | 1,74 | 1,30 |
| January – December 2020 | January – December 2019 | |
| Revenue | 24 996 056 | 20 156 447 |
| Cost of revenue | −15 276 319 | −12 440 213 |
| Marketing | −2 228 362 | −2 652 462 |
| Technologies and developments | −1 829 600 | −1 545 149 |
| General and administrative expenses | −1 076 486 | −914 369 |
| Operating income | 4 585 289 | 2 604 254 |
| Interest payments | −767 499 | −626 023 |
| Interest income or expense | −618 441 | 84 000 |
| Profit before tax | 3 199 349 | 2 062 231 |
| Amount of taxes payable or tax deduction | −437 954 | −195 315 |
| Total profit | 2 761 395 | 1 866 916 |
| Basic earnings per share | 6,26 | 4,26 |
| Diluted earnings per share | 6,08 | 4,13 |
Source: Company report, p. 10 (14)
Debt issue
The company management expects that already this year it will no longer have to borrow money to finance its operating activities and will pay a significant part of its debts from its own reserves in the accounts. This is a very original decision because now many companies are trying to borrow as much money as possible for as long as possible because of the low-interest rates on loans, even though they already have enough money.
Given that Netflix has so much long-term debt at high interest rates, perhaps it should have been concerned about issuing new debt to close out the old debt now that rates are so low.
At current rates, the company could refinance all or at least part of its existing debt at a lower interest rate, and then there would be sufficient demand for its bonds. For example, the unremarkable Ball packaging business has issued 10-year bonds with the same rating as Netflix’s bonds, at just 2.875% per annum. Netflix has an opportunity to refinance at least some of its debt on more favorable terms: all of the company’s bonds have early redemption options and demand for Netflix bonds is sure to be high. The benefit of such a decision would be very large: you can cut the interest payment costs by half.
| Coupon size | The nominal value of the issue | Date of issue | Maturity date |
| 5,375% | 500 $ | February 2013 | February 2021 |
| 5,500% | 700 $ | February 2015 | February 2022 |
| 5,750% | 400 $ | February 2014 | March 2024 |
| 5,875% | 800 $ | February 2015 | February 2025 |
| 4,375% | 1000 $ | October 2016 | November 2026 |
| 3,625% | 1459 $ | May 2017 | May 2027 |
| 4,875% | 1600 $ | October 2017 | April 2028 |
| 5,875% | 1900 $ | April 2018 | November 2028 |
| 4,625% | 1234 $ | October 2018 | May 2029 |
| 6,375% | 800 $ | October 2018 | May 2029 |
| 3,875% | 1346 $ | April 2019 | November 2029 |
| 5,375% | 900 $ | April 2019 | November 2029 |
| 3,625% | 1234 $ | October 2019 | June 2030 |
| 4,875% | 1000 $ | October 2019 | June 2030 |
| Total | 14 873 $ | – — | – — |
Source: Annual Report, pp. 55 (57)
Comparison with competitors
At first glance, the company is doing great: business is growing, demand is high. But there are a few problems related to competitors.
There are a lot of competitors. For example, over the year, the share of time spent watching Disney+ as a percentage of total hours spent on streaming in the U.S. has grown from zero to 6%, but Netflix has fallen from 31 to 28%, although the overall market has grown.
In terms of price to quantity of content available, Netflix in the U.S. is far behind, scary to say the least, Amazon.
The race for content takes money. This applies both to Netflix’s licensing of other people’s content and to the production of its own. In the first case, a typical example would be the disappearance of the most popular comedy series in the history of streaming, The Office, from U.S. Netflix in 2021: the series will go to the rival service Peacock. It’s unclear whether this will cause an exodus of subscribers from Netflix, but that’s just one example.
The problem of licensing other people’s content and the expiration of broadcasting rights is a real scourge of the service. For example, Netflix used to have the series “Mad Men,” but now it’s not there. And if in the spring of 2020 the service had both Antoine Fuqua’s The Great Equalizer, now there is only the second part.
In the case of content production, however, the coronary crisis has added to the complexity of the job and forced film and series creators to spend on stringent security measures. For example, in the case of soap operas, it’s an extra $300,000 for an hour-long series and $150,000 for a half-hour comedy series.
In the case of movies, the costs increase dramatically, because in a typical movie there are a lot more actors and changes of scenery. For example, to $165 million production budget for the third part of “Jurassic World” security measures to ensure the safety of participants in the filming added almost $ 9 million.
A huge number of series already renewed for a new season were canceled due to rising costs, including Netflix’s wonderful Glow. In 2020, the company was able to attract a lot of new subscribers by producing a lot of content at a time when many major studios were paralyzed. But it’s not about some miraculous production process here – it’s just that Netflix starts creating its content ahead of time. So essentially, what came out in 2020 was filmed before the pandemic. When that stock runs out, the company will have to work the same way as its competitors and face the same challenges.
Unemployment in Hollywood. However, the rising costs of organizing filming could be counterbalanced by a stronger negotiating position of Netflix and other content producers. The fact is that a failed 2020 for the film industry has led to massive unemployment in Hollywood. Virtually everyone who works in this field does not have a steady income: they are paid to work on a film or project. Given that work has been scarce this year, they will be more compliant, and perhaps Netflix can save money on content production without sacrificing quality. This is nothing more than a hypothesis, of course.
The race for hearts and wallets. In any case, the battle for consumers among streaming services in 2021 will be even fiercer than before, because streaming has become a priority for many companies, including such giants as Disney and ViacomCBS. Netflix is now spending the most on producing its own content, but its competitors have their own trump cards up their sleeves. HBO Max has a great library of series: “Game of Thrones,” “The Sopranos,” “True Detective. Disney has the strongest franchises: “Star Wars,” most of the Marvel intellectual property, the classic Walt Disney legacy. The very fact that Netflix competitors have their own library gives them a huge advantage, which in the long run could help them poach some of the Netflix audience, who will miss their favorite series like “The Office” on the service.
| Apple TV+ | 4,99 $ |
| Disney+ | 6,99 $ |
| HBO Max | 14,99 $ |
| Hulu | 11,99 $ |
| Netflix | 13,99 $ |
| Prime Video | 8,99 $ |
| Number of movies | IMDB from 6.0 with 300+ ratings | IMDB from 7.5 with 300+ ratings | |
| Apple TV+ | 5 | 4 | 2 |
| Disney+ | 615 | 373 | 83 |
| HBO Max | 1735 | 1066 | 421 |
| Hulu | 1016 | 506 | 87 |
| Netflix | 3781 | 1841 | 424 |
| Prime Video | 12 828 | 3548 | 568 |
| Number of shows | IMDB from 6.5 with 300+ ratings | IMDB from 8.0 with 300+ ratings | |
| Apple TV+ | 22 | 16 | 3 |
| Disney+ | 235 | 92 | 28 |
| HBO Max | 410 | 236 | 109 |
| Hulu | 1755 | 962 | 293 |
| Netflix | 1940 | 1046 | 370 |
| Prime Video | 2220 | 620 | 232 |
| Number of movies | IMDB from 6.0 with 300+ ratings | IMDB from 7.5 with 300+ ratings | |
| Apple TV+ | 1 | 1 | 0 |
| Disney+ | 88 | 53 | 12 |
| HBO Max | 116 | 71 | 28 |
| Hulu | 85 | 42 | 7 |
| Netflix | 291 | 142 | 33 |
| Prime Video | 1427 | 395 | 63 |
| Number of shows | IMDB from 6.0 with 300+ ratings | IMDB from 7.5 with 300+ ratings | |
| Apple TV+ | 4 | 3 | 1 |
| Disney+ | 34 | 13 | 4 |
| HBO Max | 27 | 16 | 7 |
| Hulu | 146 | 80 | 24 |
| Netflix | 149 | 81 | 28 |
| Prime Video | 247 | 69 | 26 |
Source: Reelgood
Summary
Netflix investors greeted the news of subscriber growth with enthusiasm: in the time since the report was published, the company’s shares have risen by almost 15%. Judging by the inflated price – P/E 94.74 – investors do not attach much importance to the growth in the number of subscribers of competitors, or to the problem of licensing other people’s content. And for good reason. There is a good chance that the worst is yet to come.
