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Netflix’s content pipeline ‘has dried up,’ ‘analysts argue



Netflix had mixed earnings for the second quarter. Wedbush Securities CEO Michael Pachter joins Yahoo Finance Live to discuss.

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Yes, and of course, Zack, Netflix has been spying on its global growth for some time. But you look at the subscriber adding numbers that are falling in North America. It certainly raises the question of whether it is actually about increased competition. Although CEO Ted Sarandos and Reed Hastings seem to brush it off to say, well, that’s not necessarily what competitors are doing.

For another voice in the conversation, let̵

7;s bring in Michael Pachter. He is the Wedbush Securities Managing Director. Michael, we know you have strong opinions about the gaming site. I’ll just wait a minute. But let’s talk about the global subscriber adds here because it’s a number that many investors have been focused on.

Things are declining here in North America. How much of that do you think is just the result of demand being drawn last year during the pandemic? How much of it do you look at and say, there are some problems on the horizon?

MICHAEL PACHTER: You know, I actually think it’s all because demand was pulled. But you know, when they pulled demand last year, I think they came so much closer to market saturation. And they love talking about global numbers, and 800 million internet households. And they have 209 million, so it’s a good ceiling height.

But the truth is that only about 85 million households in the United States have the Internet. And they are already over 60 million of them. So you know, the real question is, are they going to get the last 40%? May be. Sorry, 40%, 25 million. May be. But I do not think it will be a quick road, and that is where the competition kicks in.

Competition plays in two ways. One, for wallet, because you subscribe to multiple services. But probably far more important and overlooked by my competitors is content competition. And Disney and Fox will never give anything to Netflix again. Universal is not. Paramount is not.

So I think it’s really going to be tough for these guys competing against Disney, Peacock and Paramount Plus when these guys are holding back all the content. HBO is still an issue. I think AT&T has no idea what they’re doing. We’ll see how the Discovery partnership works. They may become desperate and may license some older content. But I really think the content pipeline has dried up for Netflix.

Yes, it had always been a concern, especially when we look at how much money they spent and how much money they burned, and negative free cash flow. They kind of got a little upset in the pandemic because their production costs came down for the quarter, though, and you saw that negative 175 million free cash flow versus positive 899 million. Of course, these guys, like I said, are tough when you think about the pandemic and the cost of production there.

But going forward, they still expect the whole year to be about a break even when it comes to cash flow. I mean, it’s an improvement based on this path we’ve seen for Netflix. So I guess that would be the counter to some of what you say about competition costs and production costs for Netflix. I mean, is that the case? Or is it just some kind of fake head based on the fact that we saw the production fall off a cliff in the pandemic?

MICHAEL PACHTER: No, 100%, you’re fine. Cash flow improves. I think these guys can be a profitable company and generate cash consistently over the next 10, 20, 30 years. They are not going away. It’s a good company.

The open question is, what are they worth? And my goal of $ 362 gives them credit for a billion free cash flow growth every year for the next 10, and discounts it back with a 5% free cash flow dividend, and I can only get to 362. So the guys with a $ 600 price target stock stuff when they go.

I mean, you can not say that Netflix is ​​less risky than a government debt bill. It makes no sense to me.

Michael, let’s talk about the game strategy. The company made it pretty clear that they are looking at this as a new content category, which compares it to the expansion they have made to original movies and animations, as well as unwritten TV. If the problem is trying to keep the subscribers you have, bring more subscribers with you at a time of saturation, will games be there for Netflix?

MICHAEL PACHTER: You know, I think Zack actually summed it up when he talked about being excited about “Stranger Things.” Netflix has been streaming for 14 years, and Zack mentioned a show that it is a big hit they own. There are not very many who are good. There are many who are hits, but not very many who are good. And these IPs are not suitable for gaming.

As bad as I am on Netflix, I’m probably just as good at gaming. This is a tough business. I have covered eight public companies – gaming companies – that have gone bankrupt in the last 20 years. It’s very tough. And Netflix shrugs its shoulders and says, well, we’ll go mobile.

Take a look at Activision, EA, Take-Two, Ubisoft and Nintendo, and tell me what their mobile skill is. They have all bought in. None of them have created a mobile game that has been successful before Activision created Call of Duty just a year and a half ago. So no, this is a really, really, very difficult business.

And I think the bigger question is, how do you get a game on TV? Let’s say you get it there because Amazon has figured out how to do it. How do you control the game? Not with the remote control. You need a game controller that talks to every TV, every Fire TV Stick, Roku Stick, Chromecast. The technological challenge is almost impossible. I do not see Netflix overcoming that challenge.

They also bowed. I mean, you know, there’s one thing that needs to be answered in the future. We talked about what kind of mobile weight it can be that can get them around it, if people are going to take them up on the offer to play mobile games. But beyond that, they bent the kind of technological advances when it comes to streaming.

And that’s something I think might be overlooked when it comes to Netflix and the way they’ve made it easier compared to some other platforms out there. Maybe Peacock. Maybe a Hulu. When you look at how the process works and how, you know, the next show can load, what do you do about maybe how Netflix has managed to make these advances to steal – the content aside – maybe bend the experience of streaming over its competitors?

MICHAEL PACHTER: You know, they do not actually operate streaming technology. They use AWS and the others. In gaming, the only company outside of Microsoft, Amazon and Google that has tried to stream games Sony. They spent over a billion dollars on Gaikai and OnLive, and they announced a couple of years ago that they will partner with Microsoft Azure to deliver their streaming initiatives.

So you have the three largest cloud providers in the world struggling to make this work. Microsoft succeeds. The other two guys are so far flops. And here is Netflix, the daring little Netflix, who shows up and says: We can do better. Good luck. It’s very, very difficult. They do not have the expertise internally to pull it off. And I think they are – some would say ambitious. I would say bold.

We’ll see if they actually do. Michael, it’s always good to talk to you. Michael Pachter, CEO of Wedbush Securities.


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