Netflix - At Risk
Netflix could be in trouble as the landscape of produced streaming video content changes. Companies that own the content in Netflix’s library are starting to create their own subscription services. First is Disney as the firm is launching its Disney+ subscription service this November. It will cost $6.99 per month.
In a survey by the research company Streaming Observer and Mindnet Analytics, 12.3% of the 602 respondents stated they may cancel Netflix and subscribe to Disney+. 2.2% stated they will definitely cancel Netflix.
While it’s possible the framing of the question caused people to say they will leave Netflix, if this survey is accurate, it could cost Netflix $117 million in lost revenue per month.
Netflix’s CEO Reed Hastings stated, “Disney and Apple add a little bit more, but frankly I doubt it will be material because again there’s already so many competitors for entertainment time.” I see his point because Netflix already competes with video games and a plethora of other entertainment options.
About 20% stated they will subscribe to both Disney+ and Netflix. 37.5% stated they will try Disney+ and 40% stated they have no interest. 37.5% of Netflix users is equal to an audience of 22.5 million people. An underappreciated issue with Disney’s new service is the technological execution. The firm has had plenty of time to get it right, but it still might botch the debut. The shows and movies could buffer or the service might not be user-friendly.
It’s likely that Disney’s service will appeal to younger viewers. 23% of parents with children aged 15 and younger said they might cancel Netflix for Disney+. Only 10% of people without children said they might cancel.
Netflix - Issues for Netflix don’t stop at Disney and Apple.
Its library of content is at risk of fleeing. Netflix is a part of the unbundling trend where people leave cable which makes them pay for channels they don’t watch. These people are going over the top and buying subscriptions like Netflix and Hulu. The next phase of unbundling could be the shows on Netflix leaving to start their own service.
As you can see from the chart above, 72% of viewing minutes on Netflix are spent on library content rater than original content which is exclusive to Netflix. Netflix’s most popular show is The Office. Netflix is in danger of losing The Office in 2021. NBC Universal plans to start its own streaming service. Also, Netflix recently renewed Friends for $100 million.
Netflix - Traffic Share
As you can see from the chart below, Netflix has a 2.4% global share in downstream mobile internet traffic. Netflix is often consumed on TVs and PCs so this isn’t a huge issue.
It’s interesting to see that Facebook has an 8.3% share, Instagram is at 5.7%, WhatsApp is at 3.7%, and Facebook Video is at 2.5%. Combined, Facebook’s family controls 20% of mobile downstream traffic. It’s amazing how the ‘other’ category is only 23.4%. Everything else is controlled by a major company. Most web browsing is done with either Chrome, Safari, or Internet Explorer/Microsoft Edge.
After reporting its great results on Wednesday afternoon, Facebook stock rallied 5.85% on Thursday. The updated results from Q1 earnings season are great. So far, as of 5PM on Thursday, 215 S&P 500 firms have reported earnings. 79% of firms beat their EPS estimates on 7.89% growth.
Remember when the bears were spreading fear about an earnings recession? That never happened. 62% of firms beat their sales estimates on 5.14% growth. It’s great to see well over half of firms beating top line estimates. Earlier in the quarter, less than half had beaten estimates.
Netflix - Microsoft Reaches A $1 Trillion Market Cap
Microsoft beat earnings estimates. That sent its stock up 3.31% to a new all time high. The firm now has a $1 trillion market cap. It’s the largest company in America. Fiscal Q3 EPS was $1.14 which beat estimates by 14 cents. The firm also beat revenue estimates. Sales were $30.6 billion which beat estimates for $29.84 billion.
Microsoft stock is up 34% in the past year while its sales were only up 14% and its net income was only up 19%. Investors for some reason are valuing Microsoft’s business much higher. Either its moat is stronger or the stock is overvalued.
Gross margins increased from 65.4% to 66.7%. Microsoft’s stock is being driven by Azure which is a monster. Azure’s revenue growth was 73%. Azure is growing quicker than AWS was when it was this size. Microsoft is taking market share in this space.
Its commercial cloud segment had growth of 41% to $9.6 billion. Q4 revenue guidance was slightly lighter than analyst expectations. The firm sees revenues between $32.2 billion and $32.9 billion while expectations were for $32.6 billion.
Commercial sales of Office 365 increased 30%. LinkedIn’s revenue growth was 27%. Clearly, the acquisition by Microsoft in 2016 for $26 billion has worked out. Those types of big deals are usually very risky. The biggest news for Microsoft this quarter will be whether it or Amazon wins a $10 billion defense contract with the Pentagon.
This cloud deal, which is called JEDI, is an important signal for how far Microsoft’s cloud platform has come in competing with AWS. Last year, AWS would have won the deal easily. Unsurprisingly, Oracle and IBM were ruled out of this deal.
Netflix - Conclusion
This earnings season has been great. Not only has it justified the rally in the first 3 months of the year; it has even sent stocks higher. Netflix could be vulnerable in the next couple years because it could lose out on The Office and Disney+ could poach subscribers.
Netflix could soon mostly consist of original programming. Originals bring subscribers in, but after they start paying, viewers mostly watch library content. Finally, Microsoft had another great quarter which sent its company to a $1 trillion market cap. The firm is being driven by its commercial cloud division
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