Netflix: running up that hill in search of new subscribers

Investors will have noted the drama of Netflix’s share price collapse, down more than two-thirds this year. But the streaming service’s executives make the point that its social relevance remains as formidable as ever. Evidence includes the chart resurgence of a 1980s song by Kate Bush thanks to its inclusion in several episodes of the hit show Stranger Things.

Cultural cachet will have to do for now. Netflix reported on Tuesday that it lost 1mn subscribers in its second quarter. Until this year, the idea that the streaming pioneer would shed both its user and investor base seemed unlikely. But Netflix admits that the service has reached a plateau.

The loss of 1mn subscribers was better than the 2mn Netflix had forecast. A bit of subscriber growth should return in the present quarter. The company has committed to creating a tier supported by advertising, a line that it once vowed never to cross, in order to wring more money out of some viewers. It also aims to clamp down on password sharing. Neither addresses the problem of Netflix’s mature subscriber base and the fact that it does not yet, and may not ever, produce a big pool of profits.

Netflix predicts that free cash flow — which deducts its massive content spending — will be about $1bn in 2022. Even after its stock price collapse, its equity market capitalisation remains $90bn. Given its stodgy growth prospects, Netflix has not exactly fallen into value stock territory on 19 times forward earnings.

Its peers, including Disney, Warner Bros Discovery and Apple are vast conglomerates with other units able to subsidise losses in their streaming efforts. Netflix lacks this. It only raised monthly charges in January, a lever it is unable to pull again soon.

Netflix has 220mn users around the world. Its ability to drive the social conversation should not be underestimated. But consistent profitability remains a concern. Some analysts believe that the company would be best served by selling to a bigger tech or media player. A buyer with excess profits able to support Netflix’s spending might benefit from its stagnant ubiquity.

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