green giant netflix is trying to turn the corner after
a shocking first quarter subscriber slump, the company is
exploring an ad supported tier and releasing popular shows like
Ozark and Stranger Things on a staggered timeline to try
to lure those users. Our next guest says these
moves are putting the company back on track, positioning
it for growth. His firm is actually upgrading the
stock from neutral to outperform joining us now, Michael
Pachter, managing director of equity research at Wedbush Securities
, thanks so much for joining us. I gotta
ask you first question here, why upgrade netflix?
What stands out right now is a positive step forward
to you at this point in time when we're seeing
so much criticism, I think from a larger scale
around streaming and just how profitable this industry is.
Thank you for having me asia. Um, you
know, I had had a sell rating on these
guys for 10 years, so from 2011 november 2011
until much earlier this year, I had to sell
, I upgraded to neutral at 3 40 it was
down halfway from its peak. Um, I just
upgraded at 1 80 and the truth is that Back
in 11, I correctly forecasted that all the media
companies would compete with their own streaming services, but
it took eight years for the first of them to
do that. Um, here we are now,
all the content that's ever going to be pulled off
of the Netflix platform has been pulled off. So
they're kind of recovering from that and they've done a
masterful job of building their own content. Um,
I never expected they would get much above, you
know, 30 or 40 million subscribers. They expanded
internationally phenomenally successful east, they have 75 million domestic
and another 145 million international. They still have room
to grow internationally. And I think what people are
missing with this recent misstep is that netflix only declined
in subs because they are so far and away the
market leader. So if you think about their subscriber
base and let's just look at domestic, You know
, they have 75 million subscribers. There's only 130
million households and only half of those are above median
income. So by definition they have about 20 or
25 million below median income households who are subscribers.
Those people are going to make a choice if they
decided to add a 3rd and 4th service whether they
can afford to pay for four at a time or
they're going to drop one in favor of another.
That's what we're seeing. And I think that phenomenon
, while likely to recur is not going to become
a persistent problem for netflix, I think they're going
to lose their few million subscribers once and then begin
back on the path to modest growth. They're taking
steps like advertising support, which is going to lower
the price and keep some of those lower income households
as members. They're taking steps like staggering releases of
their popular programming to keep people from churning out if
you spread stranger things over 13 weeks instead of dumping
it all, at once people will stay subscribers subscribers
to 13 weeks and you know, you're starting to
see them, they say crackdown on password sharing.
I don't actually think they'll end up doing that,
but that positions them to create a higher price plan
, you know, kind of an unlimited sharing plan
. And I had that with Spotify, I was
paying 9 99 a month and then my kids started
driving and they want to Spotify in the car and
they have Bluetooth connected cars. So we went from
999 to 1599 and Spotify is making$6 a month
more off of us. Netflix can do that.
So I see price increases, ad supported at a
lower price and staggering releases as getting rid of churn
and then when they start growing and minting money,
I think investors are going to appreciate the story.
Yeah. And Michael, I mean netflix is today
announcing the layoff of 150 employees across the company,
citing the slowing revenue growth and also subscriber losses that
you mentioned, still the dominant player in this industry
, but nonetheless, making layoffs is never a good
look, what are your thoughts on this? Especially
as the subscriber loss was reported weeks ago that you
had mentioned. Um, and also just seeing the
contraction that we're seeing in this arena, You know
, is I think that they drank their own kool
aid and they thought that they were going to grow
forever, you know, and I think investors also
drank that kool aid and that's why the stock ripped
up to 690 I think with the stock down here
, they have to get more realistic that maybe they're
not growing as fast as they thought they were and
they were built to continue to grow. So they're
right sizing the workforce and we're talking about a couple
of percent of their workers, it's not like they
laid off half their workers, so they're trimming and
they're going to keep trimming until they get it right
. I think that once they start growing again,
they will fund their growth out of profits. And
I think that's the prudent way to run the business
, but you know, nobody, nobody should expect
that they have a job for life anywhere, Fortunately
we have pretty full employment. So I would expect
those 150 people are going to find work elsewhere.
And honestly having worked at Netflix, they're valuable to
all the other streaming services. So odds are they're
going to all get employed pretty quickly. Netflix has
to manage this business for profit. And they're telling
investors now we're doing that. So again, this
reinforces my by thesis that the company is getting real
about, you know, how fast they're growing and
how profitable they need to be. Yeah, Michael
just about a minute left with you, I got
to know. What do you think is Netflix's biggest
pain point at this point. And where do you
think they're gonna alleviate that in the future moving forward
? Well, the biggest problem I think that they
face is that they have to decide to be two
companies one a very slow growth or no growth mature
business that generates a ton of profit and that's the
U. S. And possibly a few countries like
the UK and Australia and the other a hypergrowth business
, Asia pacific, particularly India where they can invest
resources and continue to grow. So I think once
they realize that, and once they, once they
agree that's the way to go, investors are going
to reward them. So they just have to acknowledge
that they aren't the high flyer that they were a
few months ago. All right, Michael Pachter,
managing director of equity research at Wedbush Securities, appreciate
your insight