- Tax issue ends Netflix’s year-and-a-half run of beating quarterly earnings expectations
- Management talk M&A but no direct reference to whether Netflix will bid for Warner Bros Discovery
- Netflix’s core business continues to do well and it has the clearest growth strategy of all the major streaming platforms
Dan Coatsworth, head of markets at AJ Bell, comments:
“A complicated tax issue has put a dampener on Netflix’s latest results, causing the share price to fall in pre-market trading and ending the company’s strong run of beating forecasts.
“The streaming platform had previously beaten earnings expectations for six quarters in a row. A tax matter in Brazil has put a spanner in the works and taken investors by surprise, even though Netflix has been flagging the risk for some time.
“Netflix implies the tax issue won’t be material going forward, so there is an element of treating this as a one-off setback. Tax matters aside, the core business is in a happy place.
“The streaming platform continues to produce the type of shows and films that draw in massive audiences. Big hits like Wednesday and KPop Demon Hunters have brought in new subscribers and kept existing ones happy. Live sports events are proving to be solid gold in terms of attracting viewers, while its advertising proposition continues to go from strength to strength and boost earnings.
Netflix’s strategy is working
“Netflix set out to offer consumers a wide range of content that has both mainstream and niche appeal, and it is doing it incredibly well – much to the frustration of competitors.
“The direction of travel is crystal clear. Netflix will keep developing its own intellectual property so that content lovers have a reason to keep coming back to its platform rather than watch the same thing somewhere else, and it will make its advertising proposition more sophisticated and attractive to third parties seeking to promote their goods and services. It will also keep dipping its toe in the water for new ways to engage with people, such as showing video versions of popular podcasts in partnership with Spotify.
“Netflix’s strategy is the most robust of any of the streaming platforms, and that perhaps explains why it has the biggest market share. Apple has a reputation for quality over quantity, but it is still a small fish in a big pond. Disney has been guilty of leaning on its legacy assets rather than doing something fresh and new. Amazon’s strategy is quite random but now seems to be focused more on curating a marketplace by getting people to rent shows and films as well as offering new and old content to subscribers.
The big M&A debate
“Despite Netflix’s strong market position, it cannot be complacent. That’s why there is chatter that Netflix might be interested in buying Warner Bros Discovery, which has put itself up for sale.
“Netflix is fundamentally an organic growth story, and it has done perfectly well without resorting to large acquisitions. Any deals have either been bolt-on such as buying a visual effects studio, or strategic to access a rich library of assets like purchasing the rights to Roald Dahl’s works.
“Buying Warner Bros Discovery would be a radical shift in strategy. On the plus side, it would give Netflix access to the Harry Potter film, TV and merchandise rights, which is exactly the sort of thing it could and would exploit. On the downside, there are elements to the mooted target which wouldn’t sit well, namely CNN. That’s why it is more likely that Netflix would only want part of Warner Bros Discovery, not the whole thing.
“Netflix’s management danced around the subject on its results conference call, saying it was open to ‘selective M&A’ which can be interpreted in several ways. It could mean that Netflix isn’t categorically saying no, but equally it could mean that it doesn’t want to do mega deals.
“Some M&A deals are defensive moves, even if the buyer would never admit to it. It’s easy to dismiss opportunities by saying the price is too high or that it wouldn’t add value. However, it’s important to consider if a particular target might benefit a direct competitor if they were to buy it. If so, then beating them to the deal could mean protecting market share, rather than buying something to grow it.”
