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Netflix sees jump in subscribers in Q3, praises 'Squid Game'

Rich Greenfield, LightShed Partners Partner, discusses Netflix's earnings report and the rise in popularity among international shows.

Video transcript

ZACK GUZMAN: First, I want to kick things off with Netflix, as we're watching shares there move at the break-even level here. We got the numbers coming in after the bell yesterday. The company added 4.38 million subscribers in Q3, according to what we saw back. There you can see their shares off by about 1%. The 4.38 million was above the projections that analysts had of 3.72 million. But looking ahead to the Q4 numbers, not necessarily blowing anyone away there either.

For more on that, I want to bring on Yahoo Finance's Alexandra Canal, who kicks us off today with a closer look at what we learn from Netflix. And, Allie, I suppose, you know, we've seen a lot of beats to kick off earnings season. So you really have to impress to see shares moving higher. What caught your eye?

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ALEXANDRA CANAL: Yeah, well, I think it's a positive thing that we saw that subscriber growth pick up, especially after a slow start to the year. Obviously, there are some big titles out there like "Squid Game," which I personally binged. I absolutely love that show. I don't think Netflix even predicted how successful that show would be on a global level. I also think it was interesting that they said that they would start reporting hours watched instead of actual household numbers.

And I think this really underscores that overall engagement push, not just for Netflix, but for, really, all these streaming companies, especially as they look to expand beyond their core business. For Netflix, they have video games, they have the Netflix shop. I think it's going to be important for them to see which shows are driving the most engagement, which shows consumers are most interested in and really connect with. So I thought that was another interesting point as well. But going back to "Squid Game," I think it's going to be interesting to see how they take this moving forward, and what that possibly means for other types of international content.

You know, the show was pretty cheap to make, costing just over $21 million. And it is now reportedly worth $900 million. So I think it's an interesting sign when you think about Hollywood as a whole and how much money Netflix has shelled out here. We've seen them pay Shonda Rhimes, the Duffer brothers a ton of money to produce content-- with Shonda Rhimes, that deal was valued at $100 million. And when "Bridgerton" did so well, people were like, all right, well, I guess that money was worth it.

But now we've seen "Squid Game" even outperform "Bridgerton." So I think that's causing not just Netflix but some other streaming giants to really scratch their heads here and think, OK, well, how can we expand our international content and coverage?

ZACK GUZMAN: Yeah, some analysts were taking issue with the fact that we maybe didn't see higher projections given some of the standout strength from "Squid Game"-- Deutsche Bank actually lowering their price target today, cut the rating from buy to hold-- actually kept the price target at $590, but did see that downgrade in terms of their rating on the stock. Of course, Allie, the other thing that was issued on the earnings call-- we didn't hear much about it, but when we talk about the culture there at Netflix, it's another big question given the Dave Chappelle controversy and the walkout slated there. I mean, what are you hearing, I suppose, in terms of how the company is navigating that in terms of the content on the platform and what's good and/or bad?

ALEXANDRA CANAL: Yeah, the earnings call was interesting. There was zero mention of the Dave Chappelle controversy or the walkout that's scheduled to take place today at 10:30 AM Eastern time. I did get a statement from a Netflix spokesperson who said, quote, "we value our trans colleagues and allies and understand the deep hurt that's been caused. We respect the decision of any employee who chooses to walk out and recognize we have much more work to do, both within Netflix and in our content."

Now, yesterday, the afternoon team did speak with analyst Santosh Rao, and he said that he's pretty disappointed to see how Netflix has handled this. They really haven't done a great job at addressing this controversy. And it really would impact their bottom line here if subscribers chose to not return to the platform, or maybe it turns some people off, especially since we have so much competition in this space right now. So they really have seemed to shy away from it.

It doesn't seem like anyone wants to touch this. But I do think it's a larger conversation when it comes to censorship, when it comes to what role these tech giants will play in that. So I think there are going to be more developments on that, but people really, really do not want to talk about it. And we have this walkout today-- I'm assuming that we're going to see a lot of activity from that. I don't know if Netflix is going to release more statements depending on what happens today, but it's all something that we'll be watching pretty closely.

ZACK GUZMAN: All right, let's dig back into the numbers here a little bit deeper, because we have been hearing mixed analyst reactions to what we got in that report. And so for more on that, I'm happy to bring back into the show here Rich Greenfield. LightShed Partners partner joins us right now. And, I mean, Rich, when we look at it, I suppose maybe the Q4 projection might be something we can kick off with here, because they expected 8.5 million customers in Q4. Wall Street had an average of 8.32 when you look at Q4 sign-ups. I mean, what did you make of the report and maybe the look-ahead, too, since we did see kind of a big year last year, not so great this year.

RICH GREENFIELD: Look, I think in terms of the numbers for Netflix, there's a lot of concern that the numbers weren't-- you know, the guidance wasn't big enough. You know, look, you've got to step back. You know, the numbers last year were incredible, right? They blew past expectations. Q1 and Q2 were pretty disappointing. The stock sold off pretty hard, investors were very worried that this company could not generate substantial growth going forward.

And now you look at Q3 and Q4 sort of roaring back-- and yeah, is the Q4 expectation similar to last year's net adds? It is. But I think there's a lot of reasons to look at that and see conservatism. I think for Netflix, it's all about rebuilding credibility with investors. You know, the stock has had a huge move.

I think the reality is they need to keep beating expectations. Obviously, this was a pretty meaningful beat in terms of-- percentage wise, if you look at sort of the net adds this quarter, I think you're looking at next quarter being very good. And remember, the lineup for Q1 is also incredible. And remember, Netflix is accelerating-- kind of re-accelerating its subscriber growth just as you're seeing some of their peers like Disney really hit a wall.

I mean, you're seeing people really worry that Disney's net ads, especially outside of Asia are, where they basically give it away, they're really starting to worry about what the next three, six, nine months looks like for Disney. And so I think from the standpoint of people worried that at 214 million subs, is Netflix quote unquote "tapped out" in terms of growth, I think that's a really incorrect way of looking at it. I think there's a lot of growth ahead, and it's just more of a timing issue. And I think as you start to see the Q4 and Q1 results, I think people's perception will be very different than what it is today.

ALEXANDRA CANAL: And, Rich, you keep mentioning Q4-- Netflix, obviously, very optimistic-- they say they expect 8.5 million new paid users, which is above expectations here. You seem to think that's realistic. But what are some potential headwinds that could undercut that performance?

RICH GREENFIELD: You know, look, I don't really think there are in terms of headwinds. I think the reality is-- you know, I mean, look, when you're at 70-plus million subscribers in the US and Canada, it's not like there is massive growth. I mean, you know, clearly, this is something that can move towards 80, 90 million subscribers, with Canada probably closer to 100 million subscribers, over time. But the big growth is going to come from overseas.

When you look at where they are overseas, you know, they still have hundreds of millions of subscribers to capture when you look at the size of these markets, whether you're talking Latin America, or Europe, or Asia-- especially Asia, obviously. But it's all about finding the right content. You know, and the other thing that doesn't get talked about enough and I feel like everyone is so focused on subscribers, they miss the fact that pricing was up 10% in the US.

They started to move price up in Latin America. That clearly slowed sub growth with what they did in Latin America. But Netflix is severely underpriced. When you think about the price of Netflix, the average price being $13.99 is what the kind of base plan is, think about the price of a movie ticket. A movie ticket costs $10. I mean, I'm sure the two of you go to a movie, it costs substantially more than that. That's just one movie for one person.

When you think about the fact that the average household is watching well over two hours of Netflix a day being enjoyed by the whole family with a slate of movies combined with TV series from all over the world, there is, I think, a huge amount of opportunity on the pricing side. Is it $20? $25? I don't know, but there is a lot of upside on pricing that goes far above the subscriber growth. You know, I think there will be, obviously, subscriber growth, but I think pricing becomes an increasingly important lever that is not getting talked enough about. Netflix is substantially underpriced versus its value to consumers today.

ALEXANDRA CANAL: Rich, I'm glad you brought up pricing, because I did want to ask about that. Obviously, we're in the age of inflation, I feel like all prices are going up. Now, there are some analysts that say, no-- now is not the time to raise prices because of the amount of competition. But considering the fact that Netflix does have some really strong titles coming out Q4, even Q1 of 2022, you think now is probably the time that they should raise those prices?

RICH GREENFIELD: I think what's sort of staggering to think about is that if you go back over the last year from January to June of 2021-- so over that 18-month time period, you saw Paramount+ launch, Peacock launch, you saw HBO Max launch, you saw a ton more content come out from Disney+ with a lot more subscribers, Hulu, you know, probably grew 40% subscribers-- yet time spent-- so if you look at connected TV time spent over that 18-month period-- this is Comscore data that we analyzed in a blog post the other day that we wrote-- that Netflix's total share of connected TV time spent went from 28% to 26%-- so a fairly modest decline in percentage of time spent.

Overall time spent streaming is growing rapidly. So the actual average Netflix user was actually spending more time per day watching Netflix over that period. But what is really shocking is that companies like Disney+, Hulu+, even Amazon Prime Video fell dramatically more percentage wise over that period than Netflix. And so the competition is not hurting Netflix meaningfully. It's really taking the second tier-- so these upstarts, the new ones, like a Peacock and an HBO Max-- they're eating into the Disney+ and Hulus, they're not really eating into Netflix.

And I think that's just a function of there is so much content. I mean, you mentioned "Squid Game." That's the one everyone is talking about. What nobody is talking about this morning, and they should be talking about, the number six show on Netflix today in the US is a show called "My Name." No one's talking about it. Do you know where that show is from? Korea. So two of the top six shows in the US on Netflix-- I checked just before we went on air-- two of the top six shows are from South Korea. That's incredible.

ZACK GUZMAN: Yeah, it's, obviously, something that Netflix is doing that other people aren't. And I guess that that's kind of-- the lead that they've maintained here as you're talking about it, that's part of the reason why it's been that. It's also because maybe the money that they've spent on content-- and we talked about that being something the analysts were dead wrong on, right, when we talked about negative free cash flow and how that was going to weigh on this stock-- now expected to be positive by 2022 and beyond. And again, this quarter kind of-- it was negative, but, of course, its production comes back on.

I mean, what do you look at there in terms of production costs and how they've completely been able to deny, you know, the negative analysts out there?

RICH GREENFIELD: Look, there's lots of businesses that go through investment phases. I mean, you know, I'm sure you could have said the same about Walmart in the early days, or Office Depot, or cable companies, right? Cable companies create lots of free cash flow today, and they were negative free cash flow for many years as they were building. No different than Netflix-- they basically had to build this business, and it's expensive to scale this business all over the world.

And I think that's sort of the challenge that so many other companies are facing is, like, how do they do this around the world? I think that's the huge advantage that Netflix has the lead. Remember, they've been streaming for, you know, what, 12, 13-- it's been a long time that Netflix has been in the streaming game, not to mention how many years they've been in the original programming game. They're just so far ahead of everybody else.

When you think about investors, I think the big conversation that's shifted over the last two years is it went from, oh my god, what happens if debt markets close? What are they going to do? How are they going to raise capital? Now, the question has become, as you look out two or three years, what do they do with the cash? How do they spend this much cash?

Because this thing becomes literally-- you know, it generates tremendous amounts of cash as you scale subscribers and RPU, you know, the price they charge consumers-- the cash comes in in huge amounts over the next several years. I think one of the answers is clearly movies-- is that they have to do a better job and make bigger, bolder, more zeitgeisty movies. There's no doubt that's a focus. But then the other focus is clearly on the gaming side.

They're entering video games. They see it as a huge opportunity to capture more time spent per day per household subscriber. That is going to be their use of cash. And so, look, I think that's been the real turn of events is you've gone from, oh my god, losing money, to now generating lots of cash as you look out over the next few years. And that's what's exciting.