Netflix Stock: Its True Value Could Be the Multiplex (NASDAQ:NFLX)

Netflix (NASDAQ:NFLX). Here is the lead:

The maximum price for the 52-week series is $700. The lowest price is (as of this writing) $162.

For many investors (and traders in particular), that’s all there is to know.

But there’s more to Netflix than this 52-week streak, which is fueled by recent disappointment in subscriber growth and current market conditions (read: panic on Wall Street).

Let’s remember that this is a subscriber-sized company: well over 200 million paid monthly members. Also, let’s remember that this is a company with a profitable core distribution model that’s approaching sustainable free cash flow once capitalized content spend is factored in.

Also, let’s recall that the company has significant brand equity stemming from its first-mover advantage.

We all knew this was going to happen eventually, and we also know that what I just wrote is just an echo of what everyone else is also observing: we knew growth was in question and the stock was suffering would be drawn. Of course, it’s more than a hit at the moment as the market sells off on geopolitical concerns, inflation, ongoing COVID-19 concerns and, yes, overvalued stocks.

Unless you believe that the entire market is going to go away forever, many stocks may well become a value for long-term investors. Netflix certainly has to be one of them.

What can Netflix do now? How should shareholders assess the situation? I’ll cover that in a short essay on Netflix’s current price action.

Movies and other not-so-strange things

Let me ask the second question first: If you’re a trader, you probably exited the position a few thousand market points ago and may have entered and exited the stock today. That would be the day trading option, but the technicals say the stock may not recover any time soon and that the current 52-week lows could get lower (no one can predict the future, but least of all me, best keep). Spirit).

What Netflix can do now is obvious, and no, it’s not advertising, although I’d like the company to do the same. It’s something I’ve discussed before but has now taken on a new meaning and urgency: getting behind a theatrical strategy; Bring films to theaters with a window paradigm, even a short one of thirty days (I would go a little longer though, maybe between forty-five and sixty days). Two benefits: opportunity for increased revenue and/or compensation for production costs (I say this because films often don’t pay for themselves in multiplexes), promotion of the service.

If Netflix can generate new IP that resonates with theaters, it will raise its profile in Hollywood and, with it, public awareness. In fact, Netflix should take a look at some of its notable films and seriously consider giving them a theatrical release, projects by Adam Sandler and the Russo brothers could go well beyond a limited release (as is the case with the Russo film). The gray man).

Netflix can’t just bank on its touted plans for video games — it used to be perceived as an additional element that could reduce churn and generate some signups. However, market perception has changed and even merchandising strategies, which I am very much in favor of and which I believe will work over the long term, can’t really do much about the stock decline without a multiplex division; In other words, Netflix is ​​going to need to sell a lot of merchandise, and it’s going to need big screen showings of its product to move this initiative forward in the right way.

To show how much things have changed, consider Warren Buffett’s stake in Paramount Global (PARA). The first thought you might have after reading this is: Will Buffett eventually get into a position at Netflix? We could hear about it eventually (hell, if Netflix isn’t a value stock at this point, maybe value stocks don’t exist), but it does provide some context: Buffett’s company likely views Paramount Global as a full media ecosystem, with multiple platforms, a multiplexing strategy (it’s in the Paramount name) and iconic intellectual property it’s poised to leverage through cash flow and co-financing partners. Here’s the gist: While old-school media conglomerates were once scolded for not having effective streaming strategies to capture the expansion of the stock multiple, Netflix now needs to prove it can survive its subscriber growth plateau by adding additional revenue streams. Strategies where an advertising platform is the first step.

In addition to new revenue streams, new cost control measures are required. You know what I’m getting at with this one – budgets, especially the parts that are above the line. That’s going to be difficult, because if anything has ever defined the term Catch-22, it’s the streaming business model. In order for streaming to work, you need stories, but beyond that you need stars – lots of them. And celebrities know there’s a lot of money at their disposal, so they do it. Understandable. Even if the company reduced the number of star-powered vehicles it brought into service and replaced them with story-driven projects featuring lesser-known cast members, there would still have to be a short list of famous actors who would excel at the content (even if (the longer-term content list of the cheaper over-the-line products would increase, each would still likely have a famous actor or two in their cast, scheduled for minimal screen time to anchor the project, in Hollywood jargon).

But maybe the company is reading its own memo on the matter. As reported here, the company has acknowledged that analytics content spending is on the table. Does this mean the same total content spend in dollars, but a greater yield in hours? Or a reduction in the amount of content? The key would be not to increase content spend beyond current levels, but to achieve more content for the same amount of money. The company should also carefully consider its overall business structure; It can’t keep paying hundreds of millions of dollars for moguls like Ryan Murphy unless it can be sure that showrunners only focus on commercial products designed to attract subscribers (that doesn’t always happen since the great talent tend to have a lot of freedom to do whatever they want; I get that freedom I want, but it doesn’t necessarily help shareholders looking for value creation). The supply of talent needs to go down, and I recognize that this is a complex negotiation with no easy answer (a suggestion I always make is to own another platform and/or company that breaks even managed, but can serve as a method to distribute talent’s less popular pet projects, something that could be used to lure a lower level request).

Netflix isn’t averse to trying different tactics, but the tactics have to make sense. Budget control and multiplex slates make sense to me; Breaking news about live streaming of reality/comedy programs is not. I’m not saying it can’t add value, but it doesn’t feel innovative enough.

Getting back to movies, if Netflix hasn’t announced somewhere along the line that a stranger things film would come, now would be a good time for it. Given the current status of the stock development of a low budget things A feature that could be granted a window in the multiplex with a massive merch plan to support it would be a reactionary development. Granted, I’d rather have co-CEO Reed Hastings and co-CEO and chief content officer Ted Sarandos ahead of the proverbial curve here, but that’s how business works sometimes. Netflix has been good for so long that it will take some effort to initiate a successful pivot.

All of this comes as a reminder of what may be the greatest proof that Netflix stock is in trouble: the return of the Disney (DIS)-should-buy-Netflix game.

The link above mentions a suggestion by Richard Greenfield, a notable analyst at LightShed Partners: Disney could sell Hulu (estimated proceeds $18 billion) and then buy Netflix. The theory is that it would trade the risk of losses from Hulu’s ongoing expansion for Netflix’s membership scale. It’s an intriguing proposition, although given Netflix’s current market cap of $83 billion (likely falling) and a required premium, the Hulu sale might not be enough given the debt required. Disney currently has $46 billion in long-term debt on its balance sheet as of its latest earnings report, and as a shareholder of the company, I’d probably have to see a sale of at least a sizable stake in ESPN before I can track Netflix, if not all of it Assets (ESPN is undeniably a big asset, but if Disney ever sold Hulu for Netflix, I’d question its continued investment in sports rights).

But it’s really interesting that Greenfield is proposing this, because sometimes I wonder (and I’ve mentioned this before) whether Hastings might sell to another conglomerate in the future, instead of continuing to fight against talent demands for compensation and the collective need of too fight the subscriber base for more and more content. Does he have what it takes to build Netflix into a traditional media conglomerate à la Paramount Global? He might be ready to cash out when he realizes he has no choice.

Evaluation/Conclusion

If a stock is trading at $177 (as of this writing) after hitting $700 in 52 weeks, that’s either a value play or a total disaster sell. I see value in this (for patient investors, of course). The company is profitable, it has over 200 million subscribers that big name in streaming and continues to forecast better cash flow.

I just don’t see this as the end of Netflix. I don’t think many people do that to be honest. What I’m seeing is more pain in the technical aspects of the stock — before stocks or even markets bottom and start building bases again, there could be more downside. That $162 handle off the 52-week low has given stocks a boost recently, but honestly I wouldn’t trust it, especially as I’m writing this on a day when the Dow is down over a thousand points and the S&P is down tipped over 160.

Let’s just hope Hastings and Sarandos have more businesses up their sleeves in addition to an ad-supported tier. You will need more strategies. And the courage to tell the agents no a little more often.