My Issue with Netflix and the Coronavirus
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses.
With the demand for streaming services, teleconferencing, and other products that people will use during the coronavirus pandemic increasing, investors have became bullish on companies like Zoom, Peloton (for a while), Slack, Docusign, Netflix, and others. While many of these companies have great bull cases during these times, for Netflix, I have a different opinion.
With the demand for streaming services, teleconferencing, and other products that people will use during the coronavirus pandemic increasing, investors have became bullish on companies like Zoom, Peloton (for a while), Slack, Docusign, Netflix, and others. While many of these companies have great bull cases during these times, for Netflix, I have a different opinion.
The Issue With Netflix's Bull Case
Many investors are betting that the increase in Netflix subscribers and content consumption will make Netflix a more profitable company. But, the way they tried to capitalize on the opportunity was something I found odd.
Giving people a 30-day free trial sounds really generous. Being stuck at home for a month gives people the opportunity to consume a lot of Netflix's content. People would probably not feel incentivized to pay for a subscription after consuming most of their content.
Giving people a 30-day free trial sounds really generous. Being stuck at home for a month gives people the opportunity to consume a lot of Netflix's content. People would probably not feel incentivized to pay for a subscription after consuming most of their content.
Note that the estimates below are assumptions.
With that, while Netflix needs to continue paying for expenses, its cutback on production (and possibly marketing) will drastically reduce costs temporarily. It'll sound great to investors when the upcoming quarterly numbers arrive, but at the end of the day, Netflix will continue having production costs to be its biggest expense. Unless Netflix can find ways to boost profitability of its subscriptions and lower costs of production, Netflix will continue being free cash flow negative and will continue needing to raise more capital to fund production.
Netflix will probably receive more disappointment than satisfaction from this new marketing campaign.
Conclusion
The excitement investors have over Netflix's new marketing campaign will be short lived. With the potential of lower costs and a big increase in new subscribers creating hype in Netflix's stock, investors should take a step back and think again on whether Netflix can gain a lot of success from this new marketing campaign.
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