Netflix & Tesla: The Update You've Been Looking For
Netflix lost subscribers for the first time in a decade and Tesla is incredibly profitable.
Too Long; Didn’t Read
Netflix was expecting to add +2.5 million subscribers during Q1, but instead lost -200,000. This was the first time the company reported a loss in subscribers in over a decade.
Tesla did what Tesla does best — make money. Revenue nearly doubled (2X), operating income sextupled (6X), and profits septupled (7X).
Netflix (NFLX) — the Good, the Bad, and the Ugly
What a year it’s been.
You all probably remember, but I’ll say it again — I’m not very excited about Netflix and have been a big “YouTube will eat their lunch” guy for years. Only recently did this “bearish thesis” change, and it wasn’t exactly a change.
In this post I shared my thoughts on how if Netflix could actually translate existing hit originals on their platform to the 30+ other languages international subscribers speak, they could begin to pick up some steam.
My bearish thesis for Netflix has always been around subscriber growth and spend on original content.
At some point, you run out of people to sell your streaming subscription to.
North America is saturated — which means their only hope is new international subscribers. This is why when I saw “Squid Game” make waves around the world (it was translated into 30+ languages on day one) I was temporarily excited about Netflix.
I thought maybe Netflix had solved their “subscriber” problem?
Nope. And it turns out Netflix is going through it right now. Feel free to follow along here.
Revenue: $7.9 billion, an increase of +10% YoY
Operating Income: $2.0 billion, an increase of +0.1%
Profits: $923.0 million, an increase of +19% YoY
On the surface, these financial figures don’t look too bad. However, it’s important to remember that the value of a company is not derived from what it did last quarter, but instead what it will do next quarter.
The Good —
“While we work to reaccelerate our revenue growth - through improvements to our service and more effective monetization of multi-household sharing - we’ll be holding our operating margin at around 20%.”
Netflix seems to be laser-focused on maintaining a 20% operating margin, regardless of what’s happening to their business as a whole. They can control and maintain this margin by halting their continued investment into original content. They’re also hyper-sensitive to cash flow. The company was free cash flow positive during the quarter and predict they’ll remain FCF positive throughout the next several quarters.
Not sure if this is a “good” thing or not, but they decided against repurchasing shares to maintain a healthier balance sheet.
Also, not sure if this is “good” or not — but since Russia invaded Ukraine, Netflix has halted all operation in Russia. Because of this halt, Netflix had to suspend the accounts of -700,000 paying subscribers. This obviously ate into their net new subscriber additions for the quarter.
I guess what I’m saying is, Netflix wouldn’t have experienced as bad a subscriber decline if Russia didn’t invade Ukraine. Their choice to pull out of Russia was sort of a self-inflicted wound.
The Bad —
Netflix is admitting the competition is getting harder and harder to offset.
“Competition for viewing with linear TV as well as YouTube, Amazon, and Hulu has been robust for the last 15 years. However, over the last three years, as traditional entertainment companies realized streaming is the future, many new streaming services have also launched.”
The company has also made it very clear they view cracking down on password sharing as a growth lever into the future. This may very well be true, but it’s a least another year or two away — you don’t just flip a switch and convince 100 million households around the world to cough up their credit card info.
The other growth lever the company alluded to was a cheaper, ad-supported tier for subscribers. As this could be a great idea in the long term (Roku crushed this, for example) it’s not going to be rolled out anytime soon. This is a year or two away from hitting the market, as well.
It’s also very important to understand what Netflix is doing here — they’re increasing their revenue by taking more money from existing users, not by adding users.
The Ugly —
Check out the words of Co-CEO Reed Hastings regarding investor confidence:
“We’ve got great competition. They've got some very good shows and films out, and what we've got to do is take it up a notch. I know it's disappointing for investors, but it is for sure… We're super focused on achieving those objectives and getting back into our investors' good graces.”
Reed knows investor confidence in Netflix is at an all-time-low, and it’s going to take a lot from their team to turn this around. Remember, if investor confidence is low, it can take several quarters of strong results and positive guidance to turn the stock price around.
In my opinion, Netflix is beginning to pivot their “story” away from being a growth-focused company to simply diversifying revenue to maintain margins. They’re asking themselves.. “If we can’t grow subscribers, how else do we continue to grow revenue?”
The company is now trying to get creative (buying gaming studios, cracking down on password sharing, offering ad-supported tiers) with their business — all of which won’t have a material impact at least until 2024.
As you all know, I don’t own a position in Netflix — and this earnings release didn’t convince me to open one either. I do believe Netflix has the potential to experience a “comeback” story, especially if you think about their ability to make hit originals like Squid Game.
For this to happen, the company has to hit rock-bottom first — and I’m not sure if we’re even there yet.
Tesla (TSLA) — Growing like a Weed
It’s incredible to see this company continue to be the “poster child” for what the most ideal company to invest in looks like.
Growing revenue by a healthy amount (+87%)
Operating income growth is outpacing revenue growth (+507%)
Profits are growing faster than both operating income and revenue (+658%)
Think about it for a second — Tesla is growing their revenue by +87% year-over-year, their operating income by +507% year-over-year, and their profits by +658% year-over-year.
They’re growing revenue while expanding margins, fueling their profits — the perfect storm for a rising stock price and successful company.
Their CFO stated during their earnings call (transcript) that despite experiencing one of the most challenging quarter in company history (supply chain interruptions, chip supply, shut downs at their Shanghai factory, etc.) — they still delivered record vehicle deliveries and financials.
Their automotive gross profit margins exceeded 30% for the first time in company history — coming in at 32.9%.
Their operating expenditures as a percent of total revenue earned continues to reduce, driven by higher revenue, lower stock-based compensation, and other items — allowing them to achieve a record 19% operating margin.
Their free cash flow remained strong, increasing by +660% during the quarter. They were able to use some of this cash to pay down their debt to nearly zero.
Elon Musk then jumped in and dropped a few nuggets of information for us:
Expecting +60% growth in vehicle production throughout 2022
Working on a dedicated robotaxi, optimized for autonomy
Aspiring to produce 20M vehicles / yr in the future — currently doing 1M / yr
Optimus will be worth more to Tesla than their entire car business (holy cow)
Here’s the main takeaways for me, as a shareholder — Tesla’s operating income grew substantially even despite ramping up two factories, Tesla is accelerating the monetization of its data with their insurance offering, and Tesla is continually optimizing vehicle production, reducing costs, and delivering a higher ROI for their business.
I’m absolutely going to increase my position in this company. It’s a complete no-brainer to me at this point and I’m becoming more and more excited.
If you have a long-term perspective with this company, you’ll be just fine. There’s a lot of volatility with the stock price and of course the broader market is ugly — so dollar cost averaging is going to be your friend here.
I think Tesla will soon become a top 3 holding in my portfolio.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.