1 Corinthians Chapter 15 verses 55-57 state, "Where, O death, is your victory? Where, O death, is your sting? The sting of death is sin, and the power of sin is the law. But thanks be to God! He gives us the victory through our Lord Jesus Christ."
As a Christian, I fear death like anyone else does. But I believe that Jesus Christ is my Lord and defeated death through His own death and resurrection. What does this mean? It means that I will one day die, but that like a typical night of going to sleep and waking up the next morning, once death comes it will equally pass just as quickly and I will be with God for eternity.
Investing is similar in that during short-term periods of time, things may seem bleak. But the reality is that over time, the market eventually gets it right, and the forces controlling it cannot continue to usurp their controls over it, but rather change their tune to follow suit. I see Netflix, Inc.'s (NFLX) results and SP action today as a clear indication of this. Unfortunately for NFLX, this break is a changing of the guard, as the music has stopped. NFLX is clearly now a legacy/incumbent.
NFLX SP dropped by 35% today. Many other streaming plays were down in sympathy.
Roku, Inc. (ROKU) dropped 6%. ROKU wasn't the biggest casualty either as companies like Roblox Corporation (RBLX) and Spotify, Inc. (SPOT) dropped 12.5% and 11% respectively. The Walt Disney Co. (DIS) was down 6% as was Warner Bros. Discovery, Inc. (WBD), while companies like Lions Gate Entertainment (LGF) and Comcast Corporation (CMCSA) were down 4% and 1.5% respectively.
Big Tech competitors like Alphabet, Inc. (GOOG), Amazon, Inc. (AMZN), and Apple, Inc. (AAPL) were all down as well 1.75%, near-flat, and 2.6% respectively. Interestingly, aggressive growth plays were hammered today as NFLX results sent shockwaves across the continued "slowdown" narrative concerns for growth more broadly. Today was another clear indication of how inefficient markets are during the short-term. As always, there will be winners and losers over time, and yesterday's winners are no shoe-in to continue to win for tomorrow.
NFLX key growth metrics include Paying Memberships and Monthly Revenue per Paying Membership. From these, NFLX Revenue is derived. As is the case for all growth-oriented companies, the rate of Revenue growth is key for Cash Flow margins, equating to the potential return on investment, ROI, and ultimately through valuation analysis, the expected investment return for investors as well.
The problem that NFLX is running into are twofold - slowing/declining Memberships and stagnating monetization from those Memberships. From 2018, NFLX saw Membership growth average around 20% per year, while monetization increased 4%. For Q1 2022, Memberships actually declined by 200,000 or so. This caused the epic collapse for NFLX's SP as the correlation with weakening Memberships, has been perceived for further monetization as the viscous cycle ensues.
It's not that surprising as NFLX's own graphics illustrate the company's lagging trends of 6% growth from May 2021 through February 2022. This compares to DIS 70% gains, other SVOD's nearly 20% gains, and AMZN 15% gains during the same period. This doesn't even compare AVOD, which is growing even faster than SVOD. Ironically, GOOG's YouTube witnessed a decline of 5% as user-generated content has waned more so as platforms like YouTube suffer from the fragmented nature of content and poor quality for the substantial majority of it. GOOG's YouTube performance is where NFLX is headed.
During the pivot to streaming, NFLX witnessed a clear issue - Cash Flow. The anomaly of 2020 saw a temporary increase in Cash Flow as the restricted production of content from the pandemic masked typical expenditures. During 2021, NFLX's poor Cash Flow performance returned and has been sustained thus far during Q1 2022. To date, NFLX generated over $30 billion in Revenue, with an OCF Margin below 2% and a FCF Margin being negative.
This is cause for concern as NFLX will need to ramp up content production spend to attempt to not only get Membership growth back on track, but to also reduce further concerns with respect to churn rates increasing. Per these reasons, I am modeling NFLX to see the OCF Margin once again return to negative performance for the short-term. I think NFLX will inevitably remain in a 1-2% OCF Margin even as the company scales towards $50 billion in Revenue over the mid-term. Content production spend will never be linear and will likely always necessitate increasing amounts to sustain growth and Membership stickiness. NFLX gives streaming hours tidbits on quarterly reports for specific content, but does not break this out collectively, so the cherry-picked top ten list isn't really painting a full picture of NFLX's performance.
NFLX's key issue in my opinion is associated with increasing competition from AVOD, SVOD and SVOD-advertising models. In many cases, NFLX is no longer an essential app, as users can consider free versus subscription-based service options. Even DIS's Disney+ service is substantially cheaper than NFLX, with far superior content with respect to quality and perpetual value. Cheaper SVOD options and free content will continue to place pressure on NFLX across viewing demographics.
ROKU is an entirely different opportunity with far superior upside potential. Since 2015, ROKU's Active Accounts has averaged nearly 50% annualized performance through 2021, while ARPU has been at 45%. I am modeling these rates to decline to 12% and 21% respectively over the mid-term. Clearly, ARPU is going to be ROKU's stronger driver for Revenue performance. This is where ROKU's exposure to all Revenue generated elements are conducive across AVOD, SVOD, SVOD--advertising models, as well as direct consumer purchases.
During 2022, ROKU's ARPU as a percent of NFLX annualized Paying Memberships is expected to be at 35%. By 2026, I am modeling this to increase to 67%, clearly illustrating ROKU's superior monetization of its users. For 2022, ROKU's Revenue is expected to be 11% of NFLX's - for 2026, this percent is expected to more than double towards 25%.
At the same time, ROKU is seeing a substantially stronger Cash Flow result at a much earlier growth stage of its business than NFLX. There is potential for the current 8% OCF Margin to inflect further as the company benefits from increasing market penetration and scale versus traditional TV, across all OTT services and VOD models. The ROI potential here is the key catalyst for highly lucrative investor potential returns.
As opposed to NFLX, ROKU provides comprehensive details regarding Streaming Hours that can be broken down to Streaming Hours per Active Account per day. To date, ROKU has seen Streaming Hours grow to over 73 billion, while per day metrics have grown north of 3.3 hours. For NFLX to command this amount of daily viewing hours, the company would need to see annual Streaming Hours approaching 300 billion based on 2022 Membership estimates. So while NFLX touts its hundreds of millions of Streaming Hours for select content, this is paltry in the grand scheme of things. At a minimum, NFLX should be comparing top ten performers versus the total.
While NFLX is peaking and the market is coming to terms regarding the company's future, ROKU is poised to continue to capitalize on taking market share from linear TV. In essence, NFLX's poor results are not a "concern" for ROKU as a streaming peer, but rather a shift within ROKU's platform with respect to changing consumer preferences as streaming options continue to proliferate. NFLX's loss are competitors' gains as explicitly provided by NFLX's own graphic above. This gain is of further benefit for ROKU as well.