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Netflix Finally Says The Word 'Competition'

By Jeremy Bowman - Updated Jan 24, 2022 at 10:39AM

Key Points

  • Netflix's competition has increased substantially in the last two years.
  • Management has long denied the impact, which now seems like a mistake.
  • To keep shareholders happy, Netflix needs to make a big move like an acquisition or an expansion of its business.

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After years of denying it, management admits competition is impacting growth.

It's a tough time to be a Netflix (NFLX 1.98%) shareholder.

Share prices of the streaming stock plunged 24% on Friday, nearly wiping all of its gains from the pandemic era. That's in spite of the fact that Netflix was one of the big winners early on when COVID-19 first struck, and has grown its subscriber base by nearly 60 million over the last two years.

The reason for the sell-off ostensibly was weak guidance. The streamer called for just 2.5 million new subscribers in the first quarter, much lower than its usual Q1 clip, and saw revenue growth slowing to 10%. However, beyond the headline numbers, there might be a bigger reason the stock just fell off a cliff.

A Netflix mural showing characters from its programing.

Image source: Netflix.

Competition, competition, competition

For years, Netflix Co-CEO Reed Hastings and the rest of his management team have dismissed the threat of competition, saying that the streaming market was huge and that the company had long faced streaming competitors like Hulu and Amazon Prime as well as a host of other entertainment options like YouTube, video games, and social media.

However, in the fourth-quarter report, Netflix seemed to be changing its tune. In its shareholder letter, the company acknowledged that competition had "intensified over the last 24 months" and said that the additional competition may be affecting its marginal growth. 

That seems like an understatement. Over the last two years or so, Disney+ has gone from launching in November 2019 to having more than 100 million subscribers globally, and virtually every legacy media company has launched its own streaming service, including HBO Max, owned by AT&T, Paramount+ from ViacomCBS, Discovery+, and Peacock from Comcast's NBC. 

Competition changes any market, and it's foolish for Netflix to think otherwise. Now that customers have more options, they are naturally going to be more selective and demand more from offerings like Netflix. While Netflix says its retention and engagement remain strong, it acknowledged that customer acquisition hasn't returned to pre-COVID levels. It couldn't pinpoint why, but competition seems to be the most likely explanation. After all, entertainment companies have spent the last two years overhauling themselves to launch new streaming services and stack them with content. Netflix, on the other hand, has stuck with the same playbook. While its content is continuing to resonate, the market seems to be saying that that isn't enough to bet on the stock.

Netflix also lowered its pricing in India, where it has struggled against rivals like Disney and Amazon as well as traditional pay-TV, which is as low as $3/month there, another acknowledgment that competition is impacting the business.   

Time to think big

Netflix has been a disruptor for most of its history, going from DVD-by-mail to streaming to original programming in both English and local languages around the world. But if the company wants to continue growing the way investors have come to expect, it needs to make a big move.

That could mean moving into live sports, experimenting with ads, accelerating its gaming rollout, or making a needle-moving acquisition.

One appealing acquisition target could be Nintendo (NTDOY -1.25%). Buying Nintendo would help accomplish two of Netflix's stated goals: making it a competitive player in gaming, and helping it establish franchises. The acquisition would give it a wealth of intellectual property, like the Mario universe, that it can monetize through shows, movies, and consumer products like toys and apparel. As a bonus, Nintendo is a cash flow machine and the stock looks cheap at a price-to-earnings ratio of 15.

2022 will be the first year of the streaming era when Netflix will be free-cash-flow positive. It has the stability and access to capital to make a big acquisition, and it makes sense to follow a strategy that has been successful for Disney, which has taken over Pixar, Marvel, Star Wars, and Fox to fuel its entertainment empire. Netflix has a huge audience of more than 200 million around the globe, making it an appealing partner for content creators. Adding something like the Indian Premier League, the world's biggest cricket league, could do a lot to accelerate growth in India and attract cricket fans in other parts of the world.

A big acquisition from a company that has historically been reluctant to do mergers and acquisitions would be surprising, but Netflix has to do something to stay ahead of the competition. Investors just sent a clear message that what it's doing now isn't working.

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