let's bring in tuna Moby director and senior equity analyst over at CFR,
a research tuna.
Always good to have you here. Thanks so much for joining us.
So what are you expecting from netflix's earnings later today?
Good morning baker. It's always a pleasure to be here.
I think for me um this this report is really going
to set a tone for for the rest of the year.
Uh So we know that they had some deceleration
of momentum in the first half of last year.
They did pick up quite significantly in the third quarter
For the fourth quarter. They are guiding to 8.5 million global net additions.
Um now recent trends suggest that that number was looking a
little bit aggressive based on some of the uh you know,
data points we've seen in terms of app downloads.
That being said,
I continue to believe that there is a there's potential upside to to that number
but also the fact that
the U. S. And Canada have been relatively saturated as we have noticed for some time.
So investors are gonna be looking for international markets in asia,
pacific latin America et cetera, to do more and more of of the heavy lifting.
Uh And also I might add that netflix this year,
the financial profile is going to change quite dramatically.
There gonna be turning
positive free cash.
That is something that gets investors are quite excited the idea
that they are not gonna need any more external financing.
They're gonna be self sustaining and we're
going to expect the shareholder return initiatives,
share buybacks, etcetera to get more more visibility,
so it's really a very very watershed.
I might add report for for netflix.
Alright,
so that's that means it's pretty significant that if it's a watershed moment,
I mean analysts thinking maybe E.
P. S. Of a dollar 13 revenue, maybe about 7.6 billion,
maybe anywhere between half a million and a million domestic subscribers here.
But given the fact that tuna, just a few days ago,
netflix announced that they were going to raise the price on their
on their subscription models across the board by about a dollar apiece.
Now makes netflix one of the more expensive streamers out there,
given the fact that all these other
competitors out there have cheaper options available,
is that sort of the netflix killer that
they've been waiting for going after netflix saying,
look, we're cheaper, cheaper alternative here.
That's that's one of the questions we get, every time they have a price increase.
Um you know, which as you know, they've done quite a few of those um you know,
I think that's really where we're gonna be
watching closely the Q one guidance for this year
to kind of get a read as to what impact management has built into uh you know,
the potential churn resulting from the the price increase,
but if history is any any guide baker, I think that
uh they've kind of navigated these price increases fairly well.
Um I think that uh one of the reasons is the fact that their content, um, you know,
has been significantly um, you know, ramped up and this, uh, this fraud quarter, um,
you know,
I think the pipeline has never looked better quite
frankly put on the television and movie side,
I think they have given consumers and not a lot of reasons to keep coming back.
One of the metrics they talked about reporting
more often and we're looking forward to.
That is the
um,
the number of viewing hours as opposed to the number
of accounts so that we expect to be trending quite up
because audience engagement by all accounts have continued to hold up
in the face of intensifying competition that you alluded to,
which is not going to go away
anytime soon. But I think let netflix, I like the way they have been playing this,
Ramping up their spending this year,
it could be north of $20 billion dollars in content spending,
which has been going up astronomically.
So they understand that they're gonna be
facing more competition and international markets.
I think it's where we see a lot more low hanging fruit.
That's a good point.
And let's talk content here for a moment because the third quarter netflix
benefited substantially from squid game and all the success that came from that.
But the fourth quarter, they had some really good hits in that the Witcher,
you had Tiger King, you Cobra kai,
you had the don't look up movie that had every celebrity imaginable in it.
And you also had the Dwayne johnson movie Red notice,
which netflix also said was one of their most streamed movies
in, in, in the history of the company.
So how much does the content sort of play a role here in each one of these quarters,
If they don't really have hits,
then that's going to be a big worry for them,
it plays a huge role. It always does.
Um you know, I think as I kind of look at the pipeline,
the number of new shows that they have coming out this year, um, you know,
it's miles ahead of any other competitors.
So even Q four, remember the shutdown of production during the Covid,
they bounced back very strongly and they've
had their content pipeline running very hard.
And what what's interesting here is that even though
they've thrown a lot of spaghetti seems like on the
wall there having pretty compelling hit rates when they
kind of released their top most watched shows globally.
What's remarkable international markets, accounting for
a very significant number of that.
And that's something investors tend to overlook. There's a lot of
um, local language, you know,
production that they have made it in markets like South Korea,
etcetera that have become global hits you mentioned squeak
games and there's a bunch of others that,
you know,
there are in the pipeline and I think
that's really what makes the model quite interesting because
as much as the price in these markets
internationally are much lower than us and Canada,
but everything kind of evens out when you kind of add
the uh the kind of production costs and the monetization,
they're able to get from some of these shows globally.
And that's really where netflix has a change of model in terms
of how studios think about some of these uh these uh content,
uh tuna netflix has sort of dipped their toes into the idea of video games.
I mean they haven't aggressively gone after it,
but they've sort of dipped their toes into it,
especially when it comes to content that they have from, you know,
stranger Things and other and other stuff.
But given the fact that Microsoft just acquired Activision Blizzard this week,
do you think a company like netflix is going to be
more aggressive in the video game space because of that acquisition?
Yeah, it's funny you ask that because you know,
that's the question at the top of mind.
Now, I kind of,
I can imagine studios trying to figure out what this
uh Microsoft acquisition means for their video game strategy,
especially with netflix um kind of, you know, setting that off.
So what I believe is that, you know,
we were obviously we're looking for more clarity from
netflix in terms of their video game strategy.
But I think what this shows is that this is a potentially uh you know,
compelling ancillary offering for streaming providers that could provide
another optionality in terms of monetizing uh you know,
the content franchises that they already have.
Um it's not exactly clear how yet and how long that might take, but I do believe that,
you know, more studios now are looking very closely at their video game assets,
um the major conglomerates uh and they have been rebooting those for a while.
And my sense is that um you know,
this the timing has never been better for them to kind of
try to figure out how to integrate that into their overall,
you know, content, you know, strategy.
And then the monetization is something,
I'm sure more and more people are going to be, You know,
trying to figure out as time goes on.
So fingers crossed as we kind of look for more clarity from Netflix on that front.
Okay. Do you think Netflix is still a growth stock tuna?
I mean we've had some analysts that think that
maybe you could see the stock over $700,
you see it trading at about 520 right now.
But sort of given the fact that the competition in this space is incredibly high
and they're sort of on the margins when
they're adding new subscribers at least domestically,
almost all the subscribers they add or the international numbers,
do you still consider them to be a gross stock here?
I do and that that might seem uh you know,
somewhat kind of innovative and I do believe that there's
a lot of focus on the saturated markets of U.
S. And Canada granted.
But when you look kind of look at the international markets,
some of the indicators there,
there's a whole lot of runway markets like asia, pacific,
even latin America and parts of
uh, you know eastern and central europe quite frankly.
Uh so in that regard,
I think the attention is now turning more and more to the international markets.
That's why you see the likes of Disney Plus and HBO max and peacock.
Everyone kind of aggressively rolling out internationally.
This is going to be the biggest year yet for international rollout of streaming.
But if you're netflix you're feeling good where you are, you're already global.
Uh and you're just there trying to plug some of the uh the the
lower hanging fruit in some of these
markets where broadband penetration is relatively low,
much lower than certainly north America.
Uh and there's a whole huge addressable market of of you know,
where I think all streamers are trying to,
you know, garner reporter, when you look at the evaluation were still at by baker,
we have, it's 7 25 12 month target.
Part of the reason is that we think that, you know,
there's still a lot of upside in some of the international markets and this
the company turns free cash flow positive this season ramps ramps that up.
You're gonna see the evaluation of netflix
shift towards the more traditional metrics,
right?
You know, price to free cash flow, you know,
earnings per share and things of that nature.
And that's when it kind of becomes clear when you model out
five years. I think the price today um you know, begins to look more defensible.
And of course we're going to get the answers to a lot
of our questions when netflix releases their earnings at the close today,
tuna.
Always good to have you here tuna tuna Moby
director and senior equity analyst over at CFR,
a research joining us this morning.