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Netflix: ‘We expect the bulk of the subscriber growth' to come from Asia, analyst says

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CFRA Research Media & Entertainment Analyst Tuna Amobi joins Yahoo Finance Live to discuss Netflix's Q4 earnings and what to expect from the streaming company going forward.

Video transcript

ALEXIS CHRISTOFOROUS: Want to get back to Netflix-- lots of folks talking about the company today because it is on tap to post quarterly results after the closing bell. The stock is down about 14% year-to-date. Here to break down what we should expect from the streaming giant is Tuna Amobi, Media and Entertainment Analyst at CFRA who, by the way, maintains his buy rating on the stock.

Good to see you again, Tuna. So what are you expecting from Netflix and what are you going to be listening for on that earnings call?

TUNA AMOBI: Hi, good afternoon. It's great to be with you again. No, I think this quarter, Q4, is going to set a tone for the expectations for the rest of this year. I think we know coming into the quarter that they were starting to rebound from the deceleration subscriber growth we saw in the first half of last year.

So in kind of a way, this past year is a kind of a reset year. The company is guiding to 8.5 million global net additions. You know, that number has looked recently somewhat optimistic. But we still believe that there is a potential upside to that number.

But more importantly, I think we're going to be watching to see what the Q1 guidance portends on the heels of the recent price increase in the US and Canada, any indications of potential churn, which, by the way, we don't have that much, because if history is any guide, I think they've been able to navigate those kinds of price increases fairly well.

But more importantly for this year, arguably the most important affirmation that we're looking for is the change in the free cash flow profile. We have them swinging to major positive free cash flow acceleration this year. They guided to break-even target for last year. So now, I think we're in a situation where the content pipeline has never been more robust.

They've rebounded quite strongly from the shutdown, the pandemic. And now they're kind of almost on a cruise control. So I think right now, despite the intensely competitive environment, I think the company really is well-positioned to kind of build on this momentum, especially from the international markets like Asia-Pacific, where we expect the bulk of the subscriber growth to come from.

KARINA MITCHELL: Hey, Tuna. It's Karina. Thanks for coming on. Good to see you again. So how does Netflix-- what do they need to do specifically to stay ahead of the competition? Because last year was a pretty bad year for the streaming sector overall. So how did they do that and then also keep investors happy?

TUNA AMOBI: Indeed. Last year was almost like kind of a reset year of sorts. You had several new entrants into the streaming landscape that shook up the market quite tremendously. And then you also had the potential reversal of the stay-at-home trends. You know, as far as Netflix is concerned, I think they're pulling all the right, you know, triggers, right?

They have kept the pedal on the throttle in terms of the content spending. We have been spending north of $20 billion again in content this year versus $17 billion last year. So I know the question, you know, right now is, who are going to be the streaming winners in the streaming wars? I think Netflix would have them as one of those.

Because if you look at what they're doing, especially international market where a lot of their peers are now starting to roll out, whereas Netflix has-- pretty much they have the global footprint. And one of the major catalysts that we think has been underlooked is the potential for some of the local language content that they have developed at relatively minimal cost and to travel really well.

So this kind of bodes well for monetization and continued growth in viewership hours. They talk about reporting viewership hours now for the shows-- for the top shows as opposed to the number of accounts. And I think that's going to give us more insight into how some of their top shows have been performing, where a lot of the international markets are actually accounting for more and more of the viewership gains that we see. And that's a recipe for continued growth.

ALEXIS CHRISTOFOROUS: Yeah, to that point, I know a lot of non-English shows are dominating Netflix's top 10 list right now. But I want to get back to that idea of history being a guide. I mean, with this latest price hike, you know, Netflix has never had so much competition-- it now has not only Disney+, ViacomCBS' streaming service, WarnerMedia-- even though it has some of its big heavy hitters like "Ozark," and "Bridgerton," and "Stranger Things" coming back, does it still have the pricing power it used to? Or does it risk really losing some subscribers here?

TUNA AMOBI: I would argue pricing power, Alexis, has been as good at it has ever been. And that might sound counterintuitive. But when you look at the content pipeline today compared to where there were even two years ago pre-pandemic, I think it's really night and day. So I think the consumer has demonstrated the propensity to keep coming back as long as you have more content to refresh.

And I would say the elasticity of demand for Netflix offerings is nothing out of the ordinary. So when you take $1 or $2 price increases in a market like US and Canada where, arguably, the market is relatively saturated, what they're trying to do is to make sure that in those saturated markets where there's not much low-hanging fruit left, that they're able to offset some of the pressures that they're getting on the margins from content spending.

And by the way, the way you can be comfortable about that is to look at the margin profile, which we have them this year adding another north of 300 basis points. So despite all of this huge content spending, I think the business model is able to absorb all of that in terms of the subscriber growth. So to your question, I think, you know, I think right now, the price hikes-- we don't have any reason to believe that it's going to generate any more churn that would be somewhat of concern, given the historical experience that I alluded to. And indications are that people are paying up for this-- the more that you can keep consumers coming back for more, that's really the playbook that Netflix and others now are trying to follow.

KARINA MITCHELL: Yeah, investors really didn't seem to mind when those price hikes came out. The stock actually went up. So I think they're ready to bear the extra costs. I personally can't wait for "The Crown" to come out. That's what drew me to Netflix in the first place.

But they are investing heavily in Asian markets setting up a base hit Korea. So where should they look for that subscriber growth. Because India, obviously, a huge market, and they are tapping into that with some of the programming, as well Korea and other parts of Asia. Where else?

TUNA AMOBI: You know, I think Asia-Pacific, obviously, I think is probably the market right now where they have the longest runway for growth. But even you look at some of the markets in Latin America or Central and Eastern Europe, I would argue that some of those markets still have a very decent amount of low-hanging fruit that can still be plucked out.

But remember, the economics of those markets are entirely different. And they vary quite significantly compared to North America. So what they're trying to do is kind of a balancing act here and kind of use local language production as a jumping off point.

They can have a hit, like a few hits like "Squid Game," for example, that are developed in some of those markets, what it does is to create a lot of buzz and momentum that they can now export around the world. And that's why the international markets are so critical when you talk about Netflix.

Investors seem to be focused a lot on this saturation in the domestic market, and maybe not remembering that the secular dynamics of broadband penetration in international markets are way more attractive than they are in the US and Canada at this point in time.

ALEXIS CHRISTOFOROUS: And of course, Netflix moved into mobile gaming last year-- curious to see what they're going to say about that, especially in the wake of Microsoft's buyout this week of Activision. Tuna Amobi at CFR, always good to see you. Thanks so much.

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