Analyst: Netflix’s Problem Could Be Too Much Content

As the OTT service’s stock soars, Wall Street strains to find risks
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Why This Matters: Media companies are buying assets to compete with Netflix, which is expected to report adding more subscribers when it discloses its Q2 results.

Netflix’s High-flying stock remains a favorite of Wall Street as the streaming leader gets set to release its second-quarter financial results on July 16.

Credit Suisse, for one, expects Netflix to report adding 1.2 million subscribers in the U.S. and 6.2 million worldwide and to disclose a big jump in earnings per share, to 79 cents from 15 cents a year ago.

But even analysts who strongly recommend the stock and see it heading still higher acknowledge potential pitfalls for Netflix, some of which are quite novel and thought-provoking.

In a report last week, Barclays media analyst Kannan Venkateshwar put forward the notion that Netflix might actually be churning out too much content — and not because of the billions of dollars it is borrowing to invest in programming. Venkateshwar makes the case that more content is not always more valuable.

Netflix's Lost in Space

Netflix's "Lost in Space"

So far, as Netflix has increased the volume of original programming, its shows are among the most searched for on Google, he said. It’s a sign that, despite some bad reviews for Lost in Space and some other recent releases, Netflix has managed to keep its quality perception intact, Venkateshwar added.

Recommending Well

That’s in part because Netflix’s viewers have different demographics than traditional TV viewers and Netflix has been successful at feeding its viewers’ demand for content through its recommendation engine.

But as it adds more mainstream viewers as subscribers, Netflix is getting to the point where its original content is competing with itself.

Netflix is adding original programming at a furious clip, with 1,000 releases by the end of the year, including 470 after mid-May. Time spent watching all those shows hasn’t kept pace, though, Venkateshwar said. “This in effect implies declining marginal value of content even as the average cost of content keeps creeping up.”

On top of that, the added volume of content on Netflix is eating into another of the streaming service’s key benefits — ease of navigation. There are so many shows, the analyst said, it is difficult for subscribers to figure out what they want to watch.

Because it is non-linear, Netflix’s ability to cross-market shows isn’t as powerful as the lead-in effect on traditional TV networks.

“Netflix keeps flooding its service with new shows all the time,” Venkateshwar said.

“The shift in mix away from some familiar shows towards completely new shows could shift consumer perception on service quality over time,” he added. “Quality perception is not an absolute and is not defined by the amount of money spent or a show’s production quality. Therefore, we believe Netflix needs to find a balance between new and familiar to keep its value proposition intact.”

Despite his concerns, Venkateshwar has a $450 per share price target for Netflix stock.

Credit Suisse media analyst Doug Mitchelson initiated his coverage of Netflix with an outperform rating and a target prices of $500 a share.

Among the risks to the stock climbing that high, Mitchelson cited missing quarterly subscriber guidance, DTC competition, access to content, successfully scaling in-house production, cost of content, regulations and recession.

Comparing to HBO, and Vice Versa

The bulk of Mitchelson’s report is more upbeat, comparing Netflix to HBO in its early days.

“The first U.S. premium pay service, HBO, has never seen its clear leadership challenged, and its lead in profitability has been only widening over time,” Mitchelson said. “We believe the global streaming SVOD marketplace will share a similar path, with Netflix enjoying unchallenged leadership and disproportionate scale benefits.”

To compete with Netflix and other streaming rivals, WarnerMedia CEO John Stankey, the AT&T executive in charge of the unit, has told HBO staffers that they’ll have to pump out a lot more content. According to a recording of a town meeting first obtained by The New York Times, Stankey said “it’s going to be a lot of work,” but it is important for HBO to increase its subscriber base and the number of hours subscribers spend watching its shows.

More watching equals more data about customers, he said.

He didn’t name Netflix as competitor with a lot of information about its subscribers. He didn’t have to.

Why This Matters: Media companies are buying assets to compete with Netflix, which is expected to report adding more subscribers when it discloses its Q2 results.

Netflix’s High-flying stock remains a favorite of Wall Street as the streaming leader gets set to release its second-quarter financial results on July 16.

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