Netflix: Time To Prioritize Sports Broadcasting
Contributor since 2021 / 263 Followers
Summary:
- Netflix’s password crackdown has led to impressive subscriber growth, with 1.75 million new subscribers in Q1, exceeding analyst estimates by 550,000.
- The company is exploring sports broadcasting, starting with a celebrity-driven golf tournament featuring professional golfers and F1 drivers.
- Sports broadcasting could be the next growth lever for Netflix, and it is crucial for the company to move quickly in this space to compete with other streaming platforms.
Wachiwit
Investment Thesis
The last time I wrote about Netflix (NASDAQ:NFLX), I analyzed the company’s plans of revamping its business model through its ad-supported plans and paid sharing initiatives. In this article, I offer an update on how the company has been progressing on password crackdown and also argue about the importance of adding sports broadcasting to its growth strategy.
Password Crackdown Exceeding Expectations
To say that the company’s plans of cracking down on password sharing is going much better than expected would be, in my opinion, an understatement. Netflix, which introduced paid sharing in phases during the first quarter, saw a consistent pattern across all the regions where it was introduced: an initial uptick in cancellations, which was more than offset after a certain period, as past borrowers started to create their own accounts and existing members decided to pay to include the profile of the individual with whom they were sharing their account with.
This pattern has translated into impressive subscriber growth numbers. For instance, the company reported a gain of 1.75 million subscribers in the first quarter, exceeding analyst estimates by nearly 550,000. In Canada specifically, the company’s paid membership base and the revenue growth rate today are both higher than in the U.S., compared to the period prior to the launch of paid sharing.
The company finally launched paid sharing in the U.S. last week and initial estimates, according to Antenna, indicate that there has been a sharp uptick in subscriptions. More specifically, average daily sign-ups saw a 102% increase from its 60-day average post the launch. While cancellations also saw an increase, the ratio of new sign-ups to cancellations stood at 25.6% higher compared to the 60-day average. Given that the U.S. is the biggest market for NFLX, this is indeed a very promising sign and it suggests that the company’s content library continues to attract consumers. The positive reaction to paid sharing also offers Netflix a significant source of revenue in the coming years. To offer some additional context, the company estimates that more than 100 million households have engaged in account sharing, so there is still a massive opportunity for the company to take advantage of.
Broadcasting Live Sports Needs to be the Next Area of Focus for Netflix
According to the Wall Street Journal, NFLX is planning to test live sports streaming by broadcasting a celebrity-driven golf tournament featuring professional golfers and F1 drivers. This, in my opinion, is a move that the company should have made much earlier since it offers a tremendous opportunity to further diversify its content library. With the writers’ strike expected to last for a while, the company is certainly going to feel the heat when it comes to delivering content on time. Furthermore, the Writers Guild of America has targeted Netflix and other streaming platforms in particular since they believe that streaming companies have had an adverse impact on their working conditions and have not done enough with respect to their wages. While the issues with the writers will eventually get resolved, the current situation should be a warning to the company that it’s time to diversify its content. Broadcasting live sports offers such an opportunity.
What’s surprising is that despite its competitors venturing into live-sports, Netflix is yet to make its presence felt in this space. So, it is a positive development that the company is finally exploring sports broadcasting. And in line with its “crawl-walk-run” strategy, the celebrity golf tournament would be a familiar environment for the company. The live-golf tournament would feature celebrities from the company’s Formula One docuseries, Drive to Survive, and its golf docudrama, Full Swing. Therefore, from a viewership perspective, such a tournament is a safe bet to broadcast. Moreover, given that this would be a special one-off event, it would also allow the company to further test its live streaming capabilities. Recall that the company has already taken a shot at live streaming with mixed results. While Chris Rock’s live show was a hit, the live streaming of Love is Blind Reunion did not go according to plan. Therefore, the celebrity-driven golf tournament is a perfect testing ground for the company before it ventures into mainstream sports broadcasting.
Despite being conspicuously absent in the sports broadcasting space, it doesn’t mean that the company has not tried to in the past. Last year, for instance, the company lost out to ESPN for the U.S. broadcasting rights of Formula 1 and also pulled out of the race for broadcasting rights of ATP and WTA Tennis Tours in Europe. So, the interest was always there and it appears that the company is renewing it this year. The key is whether the company, post the celebrity golf tournament, will be more aggressive in this space compared to the past.
There is no doubt in my opinion that sports broadcasting is the next growth lever that Netflix needs to pull. While there are contractual challenges, given that a typical contractual period for sports broadcasting ranges from three to ten years, which are diminishing the potential opportunities, it is still vital that the company continues to aggressively scout for them. With the celebrity golf tournament, the company will enter the “crawl” stage with respect to live sports. However, unlike in advertising and paid sharing, it’s vital that the company gets to the “run” stage at a faster rate in this space. And it’s not as if there are no opportunities at the moment. Formula One, for instance, does not have a broadcasting partner in India today and relies on its own streaming platform F1 TV, with the official broadcaster Star Sports opting not to renew their rights. Why not start there?
Valuation
| Forward P/E Multiple Approach | |
| Price Target | $428.00 |
| Projected Forward P/E Multiple | 35x |
| PEG Ratio (NTM) | 1.65 |
| Projected Earnings Growth | 21% |
| Projected FY24 EPS | $12.24 |
Source: Refinitiv, Author’s Projections, and Company’s Q1 Letter to Shareholders
The company expects second quarter revenues to come in at $8.2 billion, which represents a year-over-year growth of 3%. However, given the better-than-expected subscriber growth seen from introducing paid sharing, I have assumed second quarter revenues to grow 6% year-over-year, which translates to $8.4 billion and represents a sequential growth of 3%. If the company maintains the same sequential growth for the third and fourth quarters, then total FY23 revenues would be $34.1 billion ($8.16 billion in Q1 + $8.4 billion in Q2 + $8.65 billion in Q3 + $8.9 billion in Q4).
The company expects FY23 operating margins to be between 18 and 20%. I posit that the cheaper ad-tiered subscription would have a negative effect on margins and as such, I have assumed operating margins to be 18%, which translates to FY23 operating income of $6.14 billion.
The median non-operating expenses (interest plus non-interest expenses) over the last 5 years is $380 million, so I have assumed the same for FY23 non-operating expenses. I have also assumed the effective tax rate to be the same as last year, which is 22%. This results in FY23 net income of $4.5 billion. According to Refinitiv, the number of shares outstanding is 444.5 million, which translates to an FY23 EPS of $10.12.
The company, according to Refinitiv, currently trades at a forward P/E of 35x and has a forward PEG ratio of 1.65x. This amounts to an earnings growth rate of 21%, which would put the FY24 EPS at $12.24.
At a forward P/E of 35x and an FY24 EPS of $12.24, the price target for NFLIX is $428, which is about 2% below its current levels.
Concluding Thoughts
NFLX stock has been on a tear recently and the current momentum is every bit deserved in my opinion. The stock is up more than 50% YTD and it currently has an A+ grade on the Seeking Alpha momentum scale, which suggests that there is potential for the company to continue its move upward.
However, fundamentally, the valuation has become harder to digest. Moreover, there are a couple of pockets of uncertainty. First, it remains to be seen how the company will navigate the Writers’ strike, especially with no end at sight and with the writers having made Netflix and other streaming platforms their main antagonist. Furthermore, it’s very important that the company’s sports broadcasting plans take off soon, starting with the celebrity golf tournament. In my opinion, it’s about time that the company got serious about this space, especially since its competitors have made significant progress.
Sports broadcasting is likely to be the next battle frontier for streaming platforms. How fast NFLX shifts its focus towards this space will therefore, determine the extent of its long-term growth.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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