that the video streaming service plans to launch into mobile gaming. Investors largely ignored the discreet adfocusing instead on another quarter of disappointing subscriber growth guidance. But the move has the potential to shake up the fledgling streaming game market and resolve some of the biggest concerns about Netflix's future.
The news reached the bottom of the fourth page of Netflix's June quarter letter (ticker: NFLX) to shareholders, with juicier details revealed by Chief Product Officer Greg Peters on the Q&A of the company's quarterly earnings. company (which, curiously, carries out via live video broadcast on ... YouTube). Peters said that Netflix sees games as one more content categorysuch as movies or TV shows. Netflix will be targeting mobile phone games, rather than television, which makes sense; as Peters says, almost all of his customers have gaming-capable smartphones. (And playing a game on a connected TV poses obvious logistical challenges - a Roku remote would not make a good game controller.)
The catch is that Netflix won't charge anything extra for games, and it won't include in-game ads or in-game purchases. This, in short, is a no-revenue upgrade. At least on the surface.
CEO Reed Hastings said on the call that Netflix is โโstill a single product company. Yes, you've opened a merchandise store, and sure you're looking for product license agreements for some shows, but Hastings sees all of that simply as a way to get people to watch more videos, so they stay loyal to the service. , which would keep the churn rate down. Here's how he thinks about gaming too: There will be no direct additional income, but it should make the Netflix membership more valuable to consumers.
That decision has ramifications for other gamers in video games. If Netflix can create or license compelling games, the no-revenue business model would pose a challenge for fledgling streaming game services of
Amazon.com
(AMZN),
Alphabet
(GOOGL),
Apple
(AAPL) and others. Other services are priced from $ 5 to $ 10 a month. And almost all of the popular mobile games in the Apple and Android app stores have an obvious revenue model; buy the game, watch ads or buy updates. The Netflix model should offer a better experience, in the same way that the subscription video experience is better than ad-packed linear TV.
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Meanwhile, Netflix released June quarter results that were largely in line with its own Street guidance and estimates. Net new subscriber earnings of 1.5 million were slightly better than the one million Netflix had projected. The company forecasts 3.5 million subscriber additions in the September quarter, about two million below Street's previous forecast. There are many reasons for the slower growth: the "breakthrough" effect of huge subscriber gains during the pandemic; a weak list of first-half content, hampered by last year's Covid-related restrictions on new film and TV productions, and recent price increases in some markets. Additionally, some Netflix bears think the company has been hurt by intensifying competition from HBO Max, Disney + and other streaming services - although, on the call, Hastings denied that is true.
In a research note, Evercore ISI analyst Mark Mahaney stated that the quarter was a "payoff event," setting the stage for a rally in both fundamentals and stocks. His take: Year-over-year comparisons to the Covid period will soften, production challenges will fade, the list of content will get richer in the second half, and subscriber growth should accelerate. He believes the stock "should increase" from here.
From a broader perspective, Mahaney believes that Netflix's subscriber count may hit 500 million by 2030, up from just over 200 million now. At that point, he says, Netflix should bring in about $ 80 a share in earnings, up from the expected $ 10 and change this year. That implies an annual growth of almost 30% on a compound basis. It is true that the year 2030 is very far away. But it sees earnings close to $ 30 a share for 2025. If Netflix stays on track, it says that stocks in 2024 could trade 30 to 35 times that level, down from a multiple of 40 in future earnings, which indicates that the actions could be duplicated. As he points out, that would be a very good return, indeed.
Update: last week, I wrote an article about the German enterprise software giant
SAP
(SAP), and stated that the company should benefit over time as it shifts to a cloud-based business model.
As I pointed out, whenever a software company makes that change, it always results in some financial upheaval, as it tends to reduce revenue in the short term as customers switch from perpetual licenses (recognized in advance) to subscriptions (recognized proportionally). over time). It can be seen in SAP's June quarter results, announced last week. Revenue increased 3% in constant currency, in line with Street's estimates. But below the surface, the business was changing. Lag in the cloud increased by 20% and lag in the cloud-based version of SAP's flagship enterprise resource planning software S / 4 Hana increased by 48%. But traditional software license revenue fell 13% on a currency-adjusted basis, and service revenue, also tied to the old business model, fell 7%. While stocks did sink a bit, the story hasn't changed. SAP will emerge with a better model and double-digit revenue growth. Stay the course.
Write to Eric J. Savitz in eric.savitz@barrons.com
