Santosh Rao, head of research at Manhattan Venture Partners, joined Yahoo Finance Live to discuss Netflix’s quarterly earnings and its outlook for the company.
Video transcription
SEANA SMITH: Let’s talk about another great story in the markets today. And that, of course, is the Netflix earnings we just got a few minutes ago. If the stock is looked at for hours, it only shares about 10%. And we see the reaction because of the huge deception that Netflix has placed in the growth of subscribers, reporting 3.98 million new subscribers.
So we want to bring in Santosh Rao for a little more on this. He is head of research at Manhattan Venture Partners. And Santosh, in this report, we knew these would be very, very difficult comparisons on a year-to-year basis. Still, in terms of what Netflix advised or what we expect, compared to what we got today, a big miss here for Netflix. What is your interpretation just in terms of what it means for future growth for the company?
SANTOSH RAO: Yeah, so I mean, what you’re seeing in this term’s numbers is actually a combination of pulling forward, COVID, and everything, staying home and all that stuff. So you saw the big numbers, the banner year that was 2020. You saw everything, all these subsequent forwards. I think 1Q, you saw a bit of fog as a result. But I think if I look ahead, this is a fundamentally good story, as I think this company is generally well located. It will be cash flow breakdown this year and cash flow positive for the rest of the year – from 2022. It is therefore a very strong company on a fundamental basis, on a balance sheet, and on a liquidity basis.
Yes, in terms of flow, even in competition, they are far apart. This is the company to beat. The others have yet to catch up. They still have price power. So, many things in favor of it. Yes, there is competition. It will probably appear in the second half of the year. But the content is very strong. They spend less. They get more content. They are therefore well positioned. So I think in my opinion this is no cause for concern. Yes, a miss will be punished in this market if they are all so good of their price. But I do not think it is some reason to panic. The story is fundamentally still intact.
ADAM SHAPIRO: And yet, Santosh, we just had a guest in front of you who said that the jig is available for Netflix. And I have to tell you, many of us are just fans. I mean incredible programming, whether it’s ‘Schitt’s Creek’ or ‘Queen’s Gambit’. But how do they keep up with the experience of ridiculous amounts of money for the content?
SANTOSH RAO: No, actually they do not spend that much. I mean, it really came down to it– yes, they spend, but they deliver great content. They have a good content, especially and especially on the international market, with the localized content, it is very popular and very well received. And they have a great price capability, a great market share and mindshare. So I do not think the concert is off.
This has always been the case with Netflix. It’s too expensive. They can not do that. They can not finance themselves. The company came out and said they could finance themselves. They are not going through the debt market. They have enough cash flow to fund their own shows. And so – and they already have a good library. They actually benefited from COVID compared to the participants because they already had a good lead. So I think they have a good lead. This is their market share to lose. It’s them – I think they now have everything to maintain their competitive advantage. That’s my saying. So I do not think the concert is over. They still play a lot before and before the game.
SEANA SMITH: Santosh, what about suppressing the sharing of passwords? Because we heard that Netflix put it to the test. We haven’t really heard an update since. Do you think Netflix will actually suppress the use of passwords? And what does this mean for the future of these subscriber numbers? Do you think this would actually help things? Or do you think it could hurt Netflix?
SANTOSH RAO: I think it will help them. I mean, if you read some of the surveys – and I read some surveys there – they said that about 45% of their base – share their password. So I think if they have to have their own subscription, I think it’s a net addition to the total subscriber base. So I think it can – it will generally be an add-on if they start applying it. At first they may hesitate, but overall I think that when you have Netflix and you see the content there – and subscriber-subscriber service, the way we now consume content has changed.
I do not know if theaters are coming back. And if so, it’s going to take a long time. People are comfortable watching. And if there is good content, people will come to you. And Netflix delivers on that front. Excellent content, and no one can match it. And there are others there as well. But they can keep their own like now.
ADAM SHAPIRO: We hear how positive you are, but would not it have a negative impact on them if we get the next round of Disney Plus growth? Isn ‘t it going to be another cut from 1000 wounds?
SANTOSH RAO: Yes, I mean, it’s there. I’m not saying competition is there. And [INAUDIBLE]. I think all of these companies, competitors’ game, essentially came into the arena last year. So this will be the first full year, essentially where they will compete with Netflix. So I will see the competitive impact in the second half of this year. So it is – so they must – and Netflix can not easily rest, but rest on their laurels. They really need to execute. There is competition stuck to their heels. They must therefore be aware of it.
And they know it. They knew it all along. They have a big deal with Sony that they just signed a five-year deal. So they get content from there. They have licenses from them. So I think this is an addition to their own content. So I think they are doing their thing. And they will maintain their competitiveness. Disney is a competitor, but I think Netflix can hold their own if they continue to perform as they currently are.
SEANA SMITH: Santosh Rao, always great to get your perspective. Thank you so much for jumping in and responding to Netflix’s earnings with us. Again, the shares only share about 10% in the week of that–