Netflix Explosion Profits Report Shows Business Becomes Even More Attractive

A photo from Squid Game, Netflix’s most successful new series.

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With his report on last week’s results,


Netflix

detonated the bear crate on the stock.

On Wall Street, there has been a long-standing debate about whether the Netflix model (ticker: NFLX) would work in the long term. The revenue model is indirect: Netflix creates or buys content, generating revenue by signing and retaining subscribers. For years, he’s tapped the debt markets to fund content creation. Skeptics believed the company might never generate enough revenue to self-finance new content. Bulls always knew that the costs of content would increase over time, but they were convinced that subscriber incomes would grow faster and that Netflix would eventually become a self-sustaining, cash-generating machine.

In the first half of 2021, skeptics got the upper hand and the stock stagnated. The pace of new content introductions has slowed, due to production issues linked to the pandemic, and subscriber additions have waned, reaching the worst level of 1.5 million net additions on record in the quarter. of June.

But the company’s better-than-expected third quarter report turned the tide. Netflix added 4.4 million new net subscribers, bringing its total to 213.6 million, well above its own forecast. It plans to add 8.5 million additional net new subscribers in the December quarter, in line with its fourth quarter performance over the past three years.

Netflix says it will no longer need to borrow to fund new content and expects positive free cash flow in 2022 and beyond. It began buying back shares – $ 100 million last quarter – while making acquisitions in its core business and emerging interest, mobile games.

While the company continues to show rapid growth in the number of subscribers in Europe and Asia, growth in the US market has slowed. But co-CEO Reed Hastings still sees a huge opportunity to expand the company’s national position. In its quarterly letter to shareholders last week, Netflix noted that video streaming still accounts for only 28% of US television viewing hours, with Netflix only 6% of the total, even though consumers continue to cut the clock. cord.

Tempting to tie strong third quarter to Korean-language series launch Squid game, which, as Netflix noted, was viewed by 142 million homes in the first four weeks since its launch, making it the company’s most successful new series. But the real power of the Netflix model is its massive content budget, which produces an array of popular shows—Stranger Things, Ozark, Bridgerton, You, The Queen’s Gambit, Lupine, and King tiger, to only cite a few.

“The business seems to operate in a virtuous circle,” wrote Jeffrey Wlodarczak, analyst at Pivotal Research. As the subscriber base grows and the average revenue per user increases as Netflix gradually increases the monthly fee, the more it can spend on original content. This expands the potential target market and reduces the churn rate, strengthens its ability to increase prices and improves its position.

Netflix is ​​also adding new elements to its mix. The company’s burgeoning video game movement has the potential to revolutionize gaming in the same way it has brought about dramatic changes in the television industry. Most mobile games are either sold direct to consumers or supported by advertising and in-game purchases. Netflix intends to integrate the game into its subscription at no additional cost, advertising or other source of additional revenue. .

It’s the purest Netflix model: find ways to attract and keep more subscribers.

Write to Eric J. Savitz at [email protected]


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