Netflix: Roma and Oscar expectations
The
night of the Oscars is approaching, and the bookmakers give as great
favorite, in the best film category, "Roma" by Cuaron.
This
is a movie produced by Netflix.
At
stake, on the evening of February 24th, there will be much of the
future of the streaming giant.
In
case of victory, it would take place the first award to a movie not produced by a traditional major, but by a company founded in 2015
as a supplier of streaming products. This could establish the
possibility that the future of cinema are going to be no longer as a
queue at the box office, more or less comfortable seats, popcorn and
social vision, but a vision at home (something similar to Kindle with
the book market).
The
big multi-screens cinemas have rejected "Roma" because
Netflix requires the transition to the cinemas exclusively for three
weeks, instead of the canonical three months. This kind of revenues
counts so little for their balance sheets that they did not even
provide data on the tickets sold in the 250 US theaters where the
film was screened. In Hollywood they question themselves about this.
Netflix
are putting at stake its future.
But
at what cost, economically speaking?
At
the end of 2018 Netflix subscribers were 139 million, about 60
million in the United States. In the US are living 126 million
household , which means that almost 50% of them are Netflix users so
far.
Deloitte, in its "Digital Media Trends Survey" of
2018, states that 55% of American household (70 million) subscribed
to a paid subscription for streaming services in 2017, preferring
original content
This
means that Netflix holds almost the entire American market; which is
just getting closer to being saturated. The work would be to persuade
that small percentage of about 10 million families who, despite being
at the moment in the streaming movies market, are not Netflix
subscribers; or starting a battle to convince people who don't want
to pay for streaming services.
But
in the first six months of 2018, compared to 2.66 million new
subscribers, Netflix spent 456 million in marketing (research and
development costs) only in the US, twice the previous year. Which
means spending $ 170 to acquire a new subscriber (they were $ 65 two
years ago). Considering that the standard package costs $ 10.99, this
means it will take 16 months before going to break even on each of
these new subscribers.
Clearly
a bloody battle.
Not
to mention that the media giants who are planning to enter with great
fanfare in the sector (Disney, Amazon, Apple, Warner), will produce a
possible competition on prices and costs, both to acquire new
customers and to produce ever better content (what on which Netflix
is absolutely winning right now).
For
Netflix the challenge will move inevitably on the increase of internationally market
share, compared to its already preponderant presence
in the United States. And the first time victory to a
movie not speaking in the original English language would be a very strong
signal.
Another
financial consideration.
Today Netflix stock price, at the Nasdaq
market, is about $ 360. With an EPS (Earnings per share, ie how much
the net profit affects every single share outstanding) equal to
2.70, the P/E ratio is about 133; that means that an investor who
buys a stock is willing to pay $ 133 for every dollar of the
company's net income (or earnings).
This is an astronomical figure,
when compared to the P/E average of S/P500 (the reference index of
the US Stock Exchange) which is equal to 22 (it was 123 in May 2009,
before the great global financial crisis).
At current price, the streaming company seems overvalued. With the real risk of a possible collapse on
the stock exchange. In the case of Netflix, the motivation to
purchase its shares may be different, and partly justify the current
price (emotional purchases dictated by the desire to participate in
the results of Netflix, or the perception that the company will
produce more and more profits in the future).
The fact is that any
false steps, financial issues or reducing market share, could take a negative impact on a so high evaluation..
Therefore, commercial and financial considerations have generated
such a great expectation for this Oscar evening.
On that situation, marketing also becomes essential. No one has
ever spent like Netflix for "Roma" to promote a movie.
In order to achieve its goal, the american company has hired an expert strategist, Linda Taback, with the reputation of winning films such as "The King's Speech",
"The Artist" and "Spotlight"; she was nominated in July
vice-president in the "talent relations and awards"
department (or, in short, a war machine to break into the film
market).
Spending
on content has definitely increased in the last six months of 2018,
from 4.4 billion in the first six months to 5.5 in the remaining
six, exceeding $ 11 billion, considering the expenses in marketing.
At
the same time, the rate of growth in profits was substantially
reduced, as shown by an EPS passed from 0.85 in the second quarter to
0.30 in the last quarter of the year.
This
is because revenues did not grow proportionally to expenses (7.6
billion in the first six months against 8.5 in the second half).
The
need for liquidity has required increasing on long-term payables, as highlighted in
the Cash Flow statement, which records cash flows from financial
assets over the year of over 4 billions of dollars.
Moral
of the story: Netflix begins to have small concerns on the financial
side and small cracks in the growth trend, especially on the American
market.
Investors,
despite the price, continue to favor the title for growth prospects,
which must however move towards the international market, because the
internal seems so close to saturation.
The
night of the Oscars can be the great opportunity: growth and high quality contents.
Because, reaching the apex can happen, the difficulties arrive when you have to stay there.
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