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Netflix is holding onto 'really outlandish' valuation, New Constructs CEO says

New Constructs CEO David Trainer joins Yahoo Finance Live to discuss Netflix's overvaluation in relation to its slowing subscriber growth, the streaming service's ability to monetize content, and competing with other streaming platforms.

Video Transcript

ADAM SHAPIRO: Whenever you get a kind of report like we did from Netflix, you think of that-- and it didn't quite go this way. But back in 1912, somebody aboard the Titanic tapping Captain Smith on the shoulder saying, uh, there's an iceberg straight ahead.

Well, the person doing the tapping right now is our next guest in the stream. And that would be, as we bring into the stream David Trainer, New Constructs CEO. And the reason I use that Titanic analogy is, when I saw your note-- I also want to let you know, Alexandra Canal is joining us, by the way. But I got to ask you this, David.

I saw that you have a price target on Netflix of $170. And the stock today is trading-- I hit the wrong button. But the stock today is trading at $383. Help me understand where you're going with that? Because I feel like you're-- [TAPS SHOULDER] there's an iceberg straight ahead.

DAVID TRAINER: Yeah, I think, look, in general, I think the market is sort of reconciling to reality. And look, Netflix, our report, the meme stock original to play on sort of the Netflix titling cliches, really just seeks to hold the business accountable to its valuation. And when you look at the current stock price, it implies effectively they're going to have more revenue than Fox and Viacom combined and something like 500 million subscribers.

So the current valuation is still really outlandish, especially when you take into account the fact that, look, Netflix has burned billions of dollars, $10 billion over the last five years, to be specific. The business hasn't made money since they were in the business of distributing CDs. The streaming business is highly cash flow-negative, and it's only going to get worse.

I feel like just recently here, we've seen the market wake up to the fact that competition is crushing Netflix. And competition is only going to get worse. And the dream is over, I guess, so to speak.

ALEXANDRA CANAL: David, I do want to push back a little bit on that price target. It still seems pretty aggressive, considering we have potential growth in Asia and the international markets, still a lot of upside there. This year alone, we also have some big heavy-hitter Netflix shows coming back, like "Bridgerton" "The Crown," and "Stranger Things." So really convince me on your thesis here that Netflix is that overvalued.

DAVID TRAINER: Yeah, look, the international markets are the least profitable consumers or subscribers. They don't really make money on those subscribers. And that's where most of the growth has been coming from, which is why they remain cash flow-negative, right?

And the only year they were cash flow-positive was 2020 by a small amount. And that's when they got crushed in terms of cutting back on content because of COVID, right? Now they've announced that they're going to spend $20, $14, $17 billion-- I don't remember what the number is-- on creating content. They're going to lose money on this.

So inasmuch as we may love these shows like "Stranger Things" and others, and they've got new product coming out here, you've got to remember, they're losing money on that. And the real problem here with Netflix is that they're at a major competitive disadvantage to firms like Disney because Disney can make billions-- and they made $20 billion, excluding the Fox acquisition, over the last five years compared to Netflix losing $10 billion-- because Disney has more ways to monetize content than streaming.

Streaming is a commoditized business. I mean, how many YouTubers are out there? Anybody can stream content. And you need other ways to monetize that content if you want to have a sustainable platform, which is why you've seen all of the traditional studios, they build a reputation, a brand, a content monetization platform before streaming, not the other way around.

All streaming is is another way to onboard customers. And it can be a loss leader for these other firms because they already make money. Netflix is just a loss leader. And that's why our price target is so low because, look, they're not making any money with the current model. And if they're never making any money, the price target should be $0, right?

So 170, I think, is really fairly generous and gives them credit for fairly high sustainable margins, not as high as they are now, and a little bit more growth.

EMILY MCCORMICK: David, speaking of growth and speaking of monetization, Netflix has been breaking into video gaming, of course. And what do you think is going to be that next big avenue of monetization for Netflix then? Is it going to come from gaming? Do you think they potentially break into advertising, as has been speculated over the past couple of years? Where do you see that growth beyond just adding new subscribers coming from?

DAVID TRAINER: I mean, look, if they haven't done it yet, I don't know what they're waiting for, right? I mean, why wait to be profitable if you can be profitable if it's a real, viable option? And I see these other markets, whether it's gaming or NFTs, like they hinted at the other day, it's sort of like the Elon Musk wave promising things to keep my stock price elevated or the AMC or GameStop way of promising things to keep retail people invested in the story.

I don't think-- I mean, are they going to make money in gaming? Look, Microsoft is a 300-pound gorilla. Sony's a 300-pound gorilla in that business. Netflix doesn't have a chance to compete with those firms.

Gaming is an extremely capital-intensive business, just as content creation is extremely capital-intensive. In order for Netflix to go toe-to-toe with those incumbents, they'd have to spend tens of billions of dollars. They can't do that. Their investors don't have the appetite for that.

And then when it comes to other ways of monetizing the business, I think all of that-- advertising, look, if they could do it, they would. If they bring advertisements into Netflix the way it is now, they get crushed in terms of subscriber growth. They know that. That's why they haven't done it. I just don't think it's a really good business, not as good as it's been hyped up for people to believe.

ALEXANDRA CANAL: And David, you did say that Disney has a huge advantage over Netflix, as it can monetize content in a number of different ways. However, I do remember when Disney+ first debuted that was one of the biggest risks because Disney was so distracted by all of their other businesses, that the streaming side would suffer. Meanwhile, Netflix has poured a ton of money into content, especially compared to competitors.

And really, besides those big franchises like Star Wars and Marvel, the Disney+ library doesn't have a ton to work with. So considering all of that, don't you think Disney can really hurt itself in the long run?

DAVID TRAINER: I don't think so. You're right. Disney+ isn't necessarily the focus for Disney because it doesn't have to be because they make money in so many other places. Disney+ is just another way for Disney to onboard customers into the current profit-making machine. It's another way for them to grow their business by bringing more people into the fold through streaming into what is already a profitable business. So that's the advantage.

And Disney didn't need to rush. They could do it whenever they did. And they did it later because, meanwhile, Netflix is the one that's sort of had to burn all that cash to bring people into the streaming loop.

But you look at Hulu. You look at YouTube, YouTube TV, Apple TV, HBO Max, Paramount, what's on the screen now. These are all other competitors. It doesn't just have to be Disney that kills Netflix. It's the dozen or so other streaming firms that Netflix has to compete against. And right now, it's priced as if it's going to be by far the largest streaming firm and be able to continue to raise prices.

And I just don't think it's realistic. I think we're already seeing the impact of competition. And that competition is only going to get stiffer.

ADAM SHAPIRO: All right, we want to get you back here because this is a story that's going to play out all year because streaming is not going anywhere. As for Netflix, part two when you join us again. Thank you so much for joining us. And David Trainer is the CEO at New Constructs. Ali Canal is one of our producers and also the reporter who does Fame and Fortune for us and covers streaming as--