Yung Kim, Piper Sandler Equity Research Analyst, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss Netflix's third-quarter earnings report.
ALEXIS CHRISTOFOROUS: Want to stick with earnings because there are plenty of them and talk Netflix. That stock under some deep pressure this morning. Off more than 4% here in the premarket. The streaming giant missed Wall Street estimates for subscriber additions by more than a million, and it also offered up some disappointing guidance. Joining us now is Yung Kim, senior equity research analyst at Piper Sandler.
Good morning, Yung. I don't understand why Wall Street seems surprised by this. I mean, even Netflix came out and said, look, we probably peaked with sub-- subscribers earlier in the pandemic, and things are going to start to pull back. Do you think that Wall Street's overreacting to these earnings?
YUNG KIM: Good morning. Thank you for having me. Yeah, I mean, I think it is a little overdone. I remain a buyer here based on the story being fully intact. You're right. The, uh, the-- the sub-- the subscribers that they reported, the net adds were off by about a million. So I-- I don't think that's incredibly, um, you know, impactful to the long-term story. I think they still have plenty of runway in a-- in a number of regions.
BRIAN SOZZI: Uh, Yung has Netflix reached saturation in the US, and if so, what does that mean for the stock?
YUNG KIM: I think most folks generally assume that penetration rate in the US is around 50%. I mean, whether that's a hard wall or soft wall, that still remains to be seen. I-- I think there is still room for growth. The Street actually expected a negative number for net adds for Q3, but they actually posted a positive. So I think that shows that there is still room to grow.
ALEXIS CHRISTOFOROUS: Where do you see that growth coming from? For a long time we were looking for Netflix to expand internationally, and I guess it-- to some extent it-- it is still doing that, but where would you see the growth coming from?
YUNG KIM: Uh, I still expect Netflix to grow internationally, I mean, across all of its regions really. I mean, they haven't really-- I don't believe that they rea-- they have reached a saturation point globally. I mean, Asia, they recently, uh, you know, they posted strong numbers in Asia last night. So I think there's plenty of places where they can continue, especially if you factor in mobile-only subscriptions, which are more appealing to certain regions.
BRIAN SOZZI: Did, uh, Netflix CEO, Reed Hastings, pop the own bubble on his stock, Yung? And-- and, look, I'm calling-- let me call attention to guidance. You know, for the first half of next year they're calling out paid net adds declining year over year. Certainly that-- a large part of that is because they had a lot of pull forward, uh, with subs during the pandemic, but, uh, that is, uh, conservative guidance.
YUNG KIM: Yeah, absolutely. And that's part of, uh, the Netflix MO really. They're generally pretty conservative on what they guide to, but at the same time, I think a lot of that has to do with the year-over-year comp. I mean, they posted 28 million subs in the first half of 2020. That's a pretty tough number to, uh, repeat so having negative, uh, growth year over year is not surprising.
BRIAN SOZZI: How-- how much pressure is Netflix under right now to raise prices to maintain its double-digit growth? When-- and-- and when do you see that price increase happening and how much?
YUNG KIM: You know, the last price increase in the US happened-- was announced in January 19, so that-- that's a general window. I mean, maybe 12-- 12 months is the general ballpark that I'm trying to think about at this point. I mean, I-- I-- I'm not sure how much pressure they are in that they're continuing to grow subs, so as long as the growth maintains, I think they're in good shape. But I think there is a-- sort of a clamoring by the Street to see a price increase happen
ALEXIS CHRISTOFOROUS: If it does happen, are people going to put up with it? I mean, because now there are so many more-- even from since the last time they raised prices. There are more choices for consumers when it comes to streaming services, so do you see that some people may actually exit the platform if they go ahead and raise prices?
YUNG KIM: You know, I'm sure there will be some churn relative to the price increase. I mean, we've actually conducted a number of surveys looking at the price increase in particular, and there seems to be some willingness to accept prices. And, you know to be sure, there-- there is a general, uh, response from an audience when you throw out the possibility of price increase. There tends to be a general reluctance to do that, but, you know, Netflix has done very well in all of our surveys
In general, they've almost always been on top of our list of, uh, the the, uh, platform that subscribers use-- or that consumers use the most or use or depend on the most. So I think it is a very strong standing. And keep in mind that HBO launched earlier this year at a $15 price point. The standard, uh, tier for Netflix remains at $13. So that leaves a $2 cushion for them to-- to just be in parity with the highest, uh, priced subscription service out there. You know, there has been increased competition, but I haven't seen really-- in all of our surveys, I haven't really seen Netflix take a strong dip because of that.
BRIAN SOZZI: Uh, investors, Yung, the past decade, I would say, have-- have grown up on, uh, on Netflix burning through cash, uh, but this is-- was the third quarter in a row that they have been free cash flow positive 1.1 billion to be exact. But next year, you know, as they start making more of their original programming, that free cash flow story could turn around on a dime. How big a overhang will that be for the stock?
YUNG KIM: You know, the-- so far, it hasn't been an overhang. So I'm not sure if next year it will be one. I mean, they have posted positive this year, largely because they shut down productions and other cost savings because of COVID. Um, you know, once they get back to a-- a normal flow, I think people will focus more on their content slate than they are on the cost of putting that content slate out there. I mean, that's the way it has been going for the past few years. So I-- I don't see any reason for that to not continue. And they are getting leverage out of that content
ALEXIS CHRISTOFOROUS: Yung, what are your thoughts on Quibi? Remember, uh, this is that short, uh, video streaming service, uh, you know, debuted with much fanfare during the pandemic. Tough time to want to do something like that, but it's backed by-- by Jeffrey Katzenberg. Now it's looking at possibly needing to shut down if it doesn't find a buyer, and I'm curious, would-- would Netflix, you think, be interested in buying a Quibi?
YUNG KIM: You know, that doesn't really kind of fit into the profile that they've, uh, set up relative to their, uh, their content portfolio that they do have now. I mean, it might be interesting from their mobile-only perspective, but it doesn't really seem to fit in. Um, it would be an interesting thing to look at more closely, but just on the face of it, I'm not sure whether that fits into the offering that they already have.
ALEXIS CHRISTOFOROUS: All right. So if not Netflix, then who might be a-- a-- a fit? What would make sense to you in terms of a buyer for Quibi?
YUNG KIM: You know, before, you know, a buyer steps forward, I think the, the platform itself needs to prove that it is a viable platform for the-- for the foreseeable future. It's hard to say who would want to buy it given that it has fallen on tough times. It would have to be a buyer that thinks that it can do some kind of turnaround, that they can create some kind of content that attracts more folks.
I mean, TikTok which has a similar sort of model in-- in the short quick bites of video content, has obviously had very success-- had a very strong success, but at the same time, it's just-- it's very unclear whether Quibi can be turned around.
BRIAN SOZZI: Yung, you should put a bid in.
YUNG KIM: I will definitely do that. I'm not sure what the starting price would be at this point.
ALEXIS CHRISTOFOROUS: I like that. Piper Sandler could, uh, start coverage of your-- of your new Quibi. Yung Kim, thanks so much for being with us.
YUNG KIM: Thank you for having me.