Netflix: a crisis of faith

published 20 July 2018

905_MW_P08_Main — GLOW has helped Netflix gain Emmy nominations

Streaming giant Netflix has fallen short of its new subscriber targets. But it is still streets ahead of its media rivals. Alice Grhns reports.

"Netflix is one of those companies that functions like a religion: either you believe, or you don't," says Shira Ovide on Bloomberg View. It takes a lot of faith to sustain a valuation of 167 times trailing earnings and a 100% rise in the share price this year. However, if doubts creep in, "the whole religion is tested". Last Monday the video-streaming giant said it added around 670,000 new US subscribers in the second quarter about half as many as it had forecast in the spring. Customer growth outside the US proved disappointing too. The group's 5.15 million global streaming sign-ups fell short of Netflix's forecast by more than a million. The news gave investors a fright, wiping 14% off the share price.

A Netflix update hasn't triggered such "a brutal reaction" since two years ago when the company fell far short of its second-quarter subscriber target, says Dan Gallagher inThe Wall Street Journal. That proved "a blip", and "robust growth" quickly resumed. In fact, since then Netflix's total subscriber base is up 56%, while quarterly revenue has risen by 86%. This time around, though, a bigger Netflix has to "leap over a much higher bar". Its expanding base of subscribers brings a "voracious appetite" for original content that Netflix must continue to fund. It still expects to spend around $8bn on TV shows and films as well as burn $4bn in cash this year.

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In the last 12 months it has spent $10bn on programming, adds Ovide. That's almost five times the sum pay-television network HBO spent on buying or producing its films and television content last year. With the stakes this high, it's disappointing that we heard so little detail on what might have gone wrong. Is it a question of price rises deterring new customers or prompting current ones to leave? Are the latest programmes unpopular with subscribers?

Time will tell, but in the meantime Netflix's growing programming muscle is providing it with "a form of soft power in Hollywood", as Jennifer Saba points out on Breakingviews.Last week Netflix beat HBO in Emmy nominations thanks to shows such as Stranger Things and GLOW; the pay-TV group has dominated the nominations for 17 years. And Netflix can console itself with the thought that "traditional media is caught on the back foot after initially playing down [its] potential". It has a "ten year head start" when it comes to internet TV and original content.

Rivals are scrambling to match it by bulking up through acquisitions. Disney recently increased its bid for parts of Fox by 36% more than its original agreement, raising it to $71.3bn. Comcast last week trumped Disney with a $34bn bid for Sky, and could make a higher offer for Fox. But all this merger-and-acquisition activity takes time and energy. "A couple of weight-inducing acquisitions will not make rivals more fleet of foot."

This week Indivior's shares rose 17%, however, as the company said it had been granted a preliminary injunction against DRL, which bans the Indian company from selling or importing its generic product. This is positive news for Indivior in the near term,but "with the US suffering from an opioid addiction crisis, lawmakers are unlikely to protect the group's monopoly forever", says Rupert Hargreaves on Motley Fool. Analysts are pencilling in a 60% fall in its earnings-per-share over the next two years.

Nevertheless, there's plenty of upside if Indivior "can speed up the launch of potential blockbuster drug Sublocade", says Lex in the Financial Times. This monthly opioid treatment is believed to have a better chance of success than existing options, and hopes of $1bn sales by 2022 still look "perfectly feasible". This would represent nearly double the group's expected sales next year. And, given the severity of Indivior's share-price fall last week, "those revenues would encourage a full-blown recovery" in the stock.

Ivan Glasenberg, chief executive of commodities group Glencore, is facing lawsuits over a US Department of Justice investigation into Glencore's activities in the Democratic Republic of Congo, Nigeria and Venezuela, says Alistair Osborne in The Times. The litigants say Glencore failed to "disclose relevant infor-mation". Glencore's law firm Quinn Emanuel says the group has a "well-known appetite for risk and operates in... the world's most endemically corrupt countries". Surely investors knew that when they bought in?

Last week Johnson & Johnson's shares slipped as investors began to mull the possible long-term costs of the legal saga involving 22 women who claimed asbestos in its talc products caused them to develop ovarian cancer, says Bloomberg. A judge last week ordered the company to pay $4.69bn to the 22 women , marking the sixth-largest verdict on a defective product in US history. CFO Joseph Wolk said they would appeal the jury's decision.

Unilever's shareholders are finally protesting about the company's plan to unwind its Anglo-Dutch operation and establish its headquarters in the Netherlands, "a move that would almost certainly mean ejection from the FTSE 100 index", says Nils Pratley in The Guardian. The switch could cause troubles for those funds that have strict UK investment mandates. Nick Train of fund manager Lindsell Train, which has a 2.5% stake in Unilever, told the Financial Times that he is worried about the "likelihood that we will become forced sellers". Others need to speak up, says Pratley. Unilever's board requires a 75% majority in the UK class of shares to win a vote on the plan this autumn that could prove "a tall order if the refuseniks" get their act together.

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.