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Impact of Disney+, streaming services on Netflix has been ‘vastly overplayed’: analyst

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Bank of America’s Nat Schindler joins Myles Udland, Brian Sozzi, and Julie Hyman to discuss Netflix’s mixed Q2 earnings, the company’s expansion into video games, and the state of streaming.

Video Transcript

MYLES UDLAND: Let's talk a little bit more, Julie Hyman, about Netflx's latest quarter.

JULIE HYMAN: Yeah, you know, you guys sort of talked about subscribers a little bit. I do want to mention the forecast for subscribers also seems to be short of estimates at 3.5 million. 5.9 million, give or take, is what analysts have been projecting for this current quarter.

Let's talk to one such analyst. Nat Schindler is with Bank of America, and he covers the stock. And Nat, in your note reacting to the numbers, you said, really, the question is, what is the long-term subscriber growth trajectory for a Netflix. And did we get any sort of intel that leads us to a conclusion on that front from this quarter? Because we have had two years that have been so unusual for everyone and for Netflix, in particular.

NAT SCHINDLER: No, I don't think we learned much of anything from this quarter. Actually, they've beat net subscriber additions this quarter by quite a bit, 50% over their guidance. Now, last quarter they missed by 33%. Now, of course, these numbers are tiny if you look at total subscribers.

And as I talked with you last quarter, these are inherently volatile numbers. You're talking about, you know, less than 0.25% difference on their total subs was what they got this quarter. On next quarter's guidance versus the Street, you're talking less than 1%. So these are very small numbers and don't really mean anything on the long haul.

What you should be looking at is the sum of 2018, 2019. It's about 56 million net subscriber additions. They were very consistent about 28, 20 million-- 28, 27 million both those years. Last year was almost 37 million. This year, I'm now projecting around 16 million. But is that total going to be roughly the same, somewhere north of the-- somewhere in the mid-50 millions? If that's the case, then all we did in the pandemic is move a lot of subscribers from last-- from this year into last year and get a preview of the incredible profitability and cash flow dynamics of this business.

BRIAN SOZZI: How disappointed are you that their gaming venture at this point, just based on what they said last night, looks like a little bit of a side show for them, not a real core business?

NAT SCHINDLER: I was never expecting much here. Gaming is a highly competitive business, and it is very difficult to break into. They have some IP that they would like to have games built off of. They've already been doing this. There's nothing all that spectacular about what they sound like they're doing. It sounds like their ambitions are pretty light, at least for now.

And you know, I think it's rather telling that the last several times they've mentioned gaming, they say, oh, we're all including this quarter. They said, oh, we're already in gaming. We made "Bandersnatch," which I think the guys at Activision making Call of Duty might have a little stretch on the-- would say it's a stretch on the term of gaming. That's a choose your own adventure book. So-- and it's fascinating IP, but it isn't really what we think of as really high-end gaming.

MYLES UDLAND: You know, Nat, I'm curious-- it's Myles here. Thanks for jumping on again. I'm curious how you're thinking about their share of viewership, right? The way they framed it with, you know, they only have 7% of the whole bucket from that Nielsen survey that they had in their letter. And I'm just, you know, curious what you think maybe the team at Netflix is thinking about that long-term opportunity and how that, you know, maybe plays into your model, if it does at all here?

NAT SCHINDLER: Well, I think this is the real story, and that's been the real story for years is-- and I think people have vastly overplayed the impact of Disney+ Amazon Prime and all the other streaming services. Because in the end, what's really important is can you take share away from cable and linear TV, and they have been doing that at a rapid pace.

I do not see all these other streaming services as direct competition. They are obviously in competition for time, but people will subscribe to multiple because they will go where the content is. And where the content is going to be is on cable.

JULIE HYMAN: Nat, what do you think is the biggest risk for Netflix at this point?

NAT SCHINDLER: I mean, I think the risk here is the one we didn't learn anything about in this quarter or really this year, is that did the pandemic swing forward so many people that we really hit that second inflection point on the S curve of penetration where we're really completely, you know, saturated in many of their core markets? I don't believe that's the case. I believe there's 800 million cable subscribers globally-- cable and pay-TV subscribers globally. And they're sitting at 200 million, and they have better content so they should be able to continue to eat away at that share. But we didn't learn anything one way or the other on whether or not that's the case.

If you looked in their UCAN, or United States and Canada region, they were down in 2Q of this year. That's actually not surprising. They were down in 2019 in UCAN, and they will be in almost every Q2 going forward. Last year, 2020, was the exception with the pandemic. But that should be expected simply because this is a low-growth sub-add quarter, and you're churning off a larger and larger base each year. But the question is, are we done? Are-- have we gotten to as far as it's going to go? And you're not going to answer that question yet.

BRIAN SOZZI: Yeah, we have a graphic here showing just how many streaming services there are. I'm looking at it, right? It's Discovery-- I mean, the numbers, it's really-- it's almost getting out of hand-- Discovery Plus, Apple TV Plus, Paramount Plus. CNN Plus looks like they'll launch in 2022. When is the shakeout going to happen? Do we need all of these streaming services?

NAT SCHINDLER: Well, you know, it's not all that expensive to create a streaming service. What's expensive is crating content. And a lot of these guys are repurposing content that they already have. In the end, what matters to consumers is really new, original content that they really want to see, and it's going to be very hard for virtually anyone to compete with the budgets that Netflix and Disney and Amazon have put together. So those will be the core.

Will you subscribe to Peacock because you want to see that next "Star Trek?" maybe. But you're probably not going to keep it on all the time or-- similar to HBO, which is-- and Max and others that are doing far fewer total shows. Netflix is going for that idea that you can have, you know, as a subscriber permanent because there's always something new to watch.

JULIE HYMAN: On that front, Nat, before we let you go, favorite Netflix show right now?

NAT SCHINDLER: I'm going to say "Fauda," just because it will make me sound intelligent and thoughtful because it's something-- I quite frankly haven't actually seen it, but I'm going to say that. That makes it sound really intelligent.

MYLES UDLAND: All right, there you go, very intelligent insights, analyst Nat Schindler. Nat, always appreciate the time, Nat Schindler with Bank of America covering Netflix. Nat, we'll talk to you soon.