The video streaming market in the U.S. remains very competitive, with players like Disney (DIS), Apple (AAPL) and so on coming in to replace permanent leader – Netflix, Inc. (NASDAQ:NFLX). We believe that battle for subscribers will continue in 2022 due to the need to meet increasing demand. We also believe that in the competition for subscribers, companies will start to reduce the cost of their services or expand their features without corresponding increase in subscription price following the decline in real household income, which will have dampening effect on business in the short term. Consequently, we have decided to look into what the streaming video market is like and why Netflix remains an attractive company.
The video streaming market will continue to grow despite the normalization of social life
The global video streaming market is estimated to be worth $71 bln. It experienced a significant acceleration in 2020, when the world was struck by the record rapid spread of COVID-19 and introduction of total social restrictions, such as quarantines and lockdowns. For instance, downloads of Netflix mobile app exceeded 1 million downloads per day.
However, despite the normalization of social life, the habit of having subscription to streaming services has not changed. It has become part of everyday life in post-pandemic society. The growth of streaming services market also will be facilitated by the development of peripheral devices, such as TV consoles, where some services are already available as a pre-installed option.
The battle for consumer and their wallets will intensify
In the U.S., the market for streaming video on demand (movies on subscription) is highly competitive. Now households can choose from around 10 different platforms. However, Netflix remains the undisputed leader. Therefore, the battle for wallets in 2022 will only intensify, and the reasons are listed below.
The whole world, including the USA, is experiencing unprecedented inflation growth, primarily caused by record-high energy prices and disrupted supply chains. The strongest effect from rising commodity costs will be seen in the lower quantile. Although real household incomes will not fall to a large extent, disposable income will fall (income after all expenses, including liability payments).
The reason is that households have accumulated their debts through mortgage demand and low-interest purchases of durable consumer goods. Liabilities have slightly decreased during the stimulus period, but the effect of pent-up demand has not only made it possible to spend all the accumulated cash, but also to take on additional debt.
Debt service has become increasingly difficult. For instance, the household default composite index in the U.S. has started to rise along with the rate hike. And the market has already assumed at least 7-8 such raises. In other words, there is a question of expediency of multiple subscriptions to different services. The global situation is similar.
The decline in spending on subscription was already noticeable in the first quarter. At the end of Q1 2022, the total number of subscribers to Netflix’s platform dropped to 221.6 mln people. The outflow of Netflix subscribers is largely due to the withdrawal of the service from Russia. This represents approximately 700 000 subscriptions. Netflix showed decline by 200 000 subscriptions over the quarter. Therefore, if the company had not left Russia, we would have seen a weak increase of 500 000 subscriptions during the quarter.
However, the most important factor in Netflix’s reports is the expected decline in subscribers in Q2 by 2 million against increase in subscriptions by 2.4 mln people expected by analysts. We believe that investors have sharply reacted to the report and the stock has collapsed by more than 40%, but things are not that bad. The business is still attractive. Let’s consider the evidence.
Netflix is our favorite
Firstly, the service will become cheaper. Netflix now offers subscription charges equal to the market prices. However, by creating family accounts with advertising (it will reduce the subscription cost per person), the company can attract new subscribers.
Secondly, projects win hearts of the audience. The company develops local projects in Asian and European countries, which brings them global recognition. For example, the South Korean films alone have won at least 109 awards for the platform.
Thirdly, it will retain high market share. Nevertheless, we believe that in the long term, Netflix will not lose significant market share and will remain the largest service by reducing cost and generating unique content.
Netflix is the leading company in the streaming services market. Despite slower growth and increased competition, the company manages to maintain its position and grow at a rate similar to the market pace. The consensus forecast greatly overestimated its upside – as a result, Netflix failed to meet analysts’ expectations, and its market capitalization fell by almost 40%. Now it creates an excellent investment opportunity for long-term investors, as the upside in share price is 155%.
Factors contributing to the quote’s increase
- Attraction of a large number of subscribers by producing exclusive content;
- Development of the gaming division, which will increase attention of users to the service and create additional source of income for the company.
- Significant development of films and best-selling TV series based on well-known competitor franchises;
- Short-term user outflow higher than expected, due to increased pressure on consumer incomes caused by global commodity inflation;
- Potential failure of the Netflix pilot against the new type of low-cost subscription with ads, which will cause additional user outflow exceeding our expectations.
The streaming video market will remain attractive even after complete removal of quarantine restrictions since households have acquired a new habit of enjoying their favorite movies or TV series from the comfort of their own homes. The growing demand for movies via subscription will also be boosted by increasing supply of peripheral devices and smart TVs with pre-installed streaming platforms.
The streaming video market is already highly competitive. Companies will have to compete for the wallet of the consumer in 2022 as well. We consider Netflix to be our favorite because the company will be able to maintain market share by gradually reducing subscription costs and actively generating unique regional content.