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Analyst breaks down what’s ‘really exciting’ about Netflix

Yahoo Finance’s Julie Hyman, Brian Sozzi, and Brian Cheung discuss Netflix and the streaming landscape with Nat Schindler, Bank of America Securities Research Analyst.

Video Transcript

BRIAN CHEUNG: Let's shift back to Netflix, which reported earnings yesterday. If we highlight their performance for the third quarter, $7.5 billion in revenue on the top line, $2.89 on the bottom line, beating the Street's estimates, although. Some questions about where subscribers go from here. So for more on this, we've got Nat Schindler. He's a Senior Internet and Digital Media Analyst at Bank of America Global Research. And Nat, it's great to have you on the show this morning.

In your note you said that you see a high likelihood of Netflix actually underestimating net subscription ads. And that could be because of the windfall that we'll see from maybe Squid Game, titles like You, which might not be fully factored until the fourth quarter. Give us a little bit more color on that call.

NAT SCHINDLER: Well, yeah, this particular quarter is the most packed quarter with new content that they've ever had. And that's a relic of the pandemic. A lot of content was slowed down. That's why earlier this year we had weaker numbers. There just wasn't a lot of new stuff.

So as you push this stuff into a single quarter, we would expect it would be hard for the company to estimate. And I think that Squid Game-- and you mentioned it-- is the perfect example of what they could-- they had no idea how successful Squid Game would be. No one could have predicted this being the most successful show that Netflix has ever had in number of viewers or hours in the first 28 days. So that just shows you the power of the Netflix system. Netflix is effectively democratized content production around the world.

You know, great storytelling has always been a global thing. It has never been limited to a few miles from Hollywood Boulevard. But because of really high production values coming out of Hollywood, they had gotten this kind of monopolistic approach to global content. But that's gone now.

Netflix has shown that you can make great content anywhere. And will they make another Squid Game? I have no idea. Netflix has no idea. There's no way they can predict a Squid Game in the first place. But they're taking a lot of swings at that bat. And you know, every once in a while, you get a home run.

So with that really cheap content that you're creating that can have huge impact, that's the really exciting thing that's coming out of the last few months of Netflix. Now, why is the stock down 2% on these results which were better than expectations? It's largely at that point, this is noise. The stock was expected to move 9% on earnings just by the options implied move. So this is not much of a move, and just basically, a sell the news with you got basically the results that everybody expected after they started seeing the data for Squid Games.

BRIAN SOZZI: Nat, you're right on the mark. They are taking a lot of swings for home runs in terms of content. And they talked a lot about that on the earnings call last night. 2022 will be huge in terms of original content from them compared to prior years. But does that increase the risk of investing in Netflix? I mean, to your point, nothing could be assured that any of this stuff is going to be hits.

NAT SCHINDLER: No, you can never know it's going to be a hit. But obviously, Netflix has a very good track record of making a lot of great content. And Netflix beats out every other player out there with just sheer volume. So again, they're swinging a lot of times at that bat. And they're doing it effectively because they can make this content at a much lower price in a lot of places.

Yes, some of their stuff is extremely expensive. But a lot of it, you're not seeing Game of Thrones level costs for the vast overwhelming majority of what they're making. So they're able to take a lot of swings. And you're going to get some really great storytelling, some things that are really exciting to people globally that no one could possibly have predicted.

And you're going to get other ones that you could totally predict. The Witcher season two is going to be a hit, almost undoubtedly. They have a lot of demand for it before it comes out. Stranger Things season four coming out likely in Q1, that's going to be a hit. We know these things.

So you've got these kind of guarantees. And you got these option value plays. And no one else has that. Everybody else has the giant slugger going up at bat who may or may not strikeout. But they only got one guy. That's it. Netflix has a whole lot of sway. And maybe I'm stretching that analogy just too few--

JULIE HYMAN: Or maybe or maybe a whole league, I don't know how you would say it, Nat. And speaking of which, by the way, we were just showing some video of the show that has now knocked Squid Game off its top perch, which is You, which looks super creepy. But I haven't seen it yet. Nat, you know, there were some leaking in the press of some of the internal metrics that Netflix uses where they try to value each of those shows, are they worth it, sort of a cost benefit.

From your perspective, what is the most important number when it comes to Netflix. Is it just the subscriber growth? And that's it. Is it revenue per subscriber? What is your sort of the go-to number for you?

NAT SCHINDLER: Well, in any given quarter you look at four numbers. You look at this quarter, next quarter, net subscriber additions. And you look at operating margins. That's all you can really look at. Those numbers that you heard in the press of Squid Games costing $21 million and generating $900 million in value.

That's coming out of-- Netflix has in their financial teams-- and most companies have an FP&A group, financial planning and analysis. Netflix has a CP&A group, a content planning and analysis group, and a finance team that kind of decides whether or not something is worth it. And they have a lot more data than you and I do, but they still don't know. It's still a guess.

How do you assign $900 million of value to Squid Game? Because it may have gotten someone to subscribe, but that person might have subscribed for one month. After they watched Squid Game and left. Or Squid Game might have been a great show for someone to watch, and someone did. But they subscribed because they really wanted to see Seinfeld. It's really hard to really clearly know what any one piece of this content really drives. And even Netflix doesn't know.

But Netflix is shown that if you just make a lot of great content, people will subscribe. And better than subscribe, they'll stay subscribed. And that's where all the growth is. If you really look at what Netflix has done in growth, their subscriber growth isn't just getting new people who have never seen Netflix before, and never been on Netflix before. That's actually fairly rare at this point outside of-- it certainly in UK region and India, or Europe in the US, in those regions where most of the growth really comes from, or has come from in the past, all they're really doing is they're keeping you longer.

Instead of subscribing for three months, you're subscribing for nine months. Or instead of subscribing for six months, you're subscribing permanently for a year. So that's the real value. And that's what Netflix has done by creating so much.

BRIAN CHEUNG: Yeah, and what's really interesting is, I feel like it's almost comparable to Squid Game, their approach to content. The amount of content-- if you just have as many of them out there as possible, and you let them duke it out, ultimately, only the few winners are going to be left standing. And those are ultimately going to be the cash cows. But Nat Schindler, Senior Internet and Digital Media Analyst at Bank of America Global Research. Thanks for stopping by.