Winning the Streaming Wars? So 2023. What Netflix Investors Need Now: A Coherent Narrative

You’d think Netflix wouldn’t have much to worry about at this point. 

Its stock is up 40 percent over the past year, analysts are falling all over themselves (ahem) to declare the company the winner of the streaming wars, its rivals are once again supplying it with popular content, and management is expected to report the largest year-over-year revenue growth in two years when Q4 2023 earnings are revealed Tuesday.

And yet, in the current market environment, even Netflix can’t rest on its laurels for very long. 

Questions are starting to emerge about what one might term the entropy of the streamer’s victory. For instance, what will happen once the current subscriber influx from its successful password-sharing crackdown subsides? And how will Netflix continue to propel its upward trajectory, not to mention absorb the impact of the new higher residual payments won by writers and actors in last year’s Hollywood strikes?

At least one Wall Street firm is already showing skepticism: Citigroup downgraded Netflix stock in a research note earlier this month, arguing, “We no longer find the risk-reward compelling” in light of “a handful of small risks — lower revenues, higher content costs and potential M&A.”

Furthermore, Citi analyst Jason Bazinet told Fortune Netflix’s narrative could get more complicated as it attempts to expand its business, generating additional concerns and questions that may muddle the company’s standing in the eyes of investors.

“If you can explain a story in two lines to your grandmother, that will get a higher multiple,” Bazinet said. “As soon as you start mixing up nine different things that can go right or go wrong, people get bogged down, and that ends up hurting the multiple.”

As such, this question will likely hang over Netflix’s 2024 even if its success continues throughout the year: What exactly is the company’s narrative going forward?

Having scored a significant but short-term win with the password-sharing crackdown, the streamer will soon be facing the same challenges that were looming before it was launched: stagnating subscriber and revenue growth coupled with rising content expenses, challenges that are difficult for Netflix to surmount as it approaches the limits of its total addressable market.

Of course, the streamer has recently expanded its TAM with the introduction of its cheaper ad-supported plan. An Insider Intelligence forecast recently projected Netflix will rake in more than $1 billion in ad revenue this year, though the company has yet to publicly report any financial figures for the ad tier. (One big question investors should be asking over the next few quarters is when advertising will start materially contributing to the streamer’s revenues.)

One thing Netflix has recently revealed: The AVOD plan has surpassed 23 million global monthly active users, a significant uptick from the 15 million it had in November. Still, that’s less than 10 percent of the streamer’s global subscriber base, and with average revenue from an ad-tier user already exceeding that of an ad-free subscriber, it’s clear Netflix must push more users to the AVOD plan if it hopes for advertising to fuel revenue growth. (Anecdotal evidence suggests the streamer is indeed trying to funnel some users from ad-free to ad-supported plans.)

This all begs the question of whether Netflix can continue as a pure-play video streamer, even as it maintains a position as the undisputed top dog in the sector. At the company’s stock peak in 2020-21, analysts often speculated on whether Netflix would purchase a legacy studio, a prospect that seems to have passed. For all the chatter about potential Paramount buyers these days, Netflix is not often floated as a possibility.

That’s probably why the streaming service is instead pushing rather aggressively into video games, despite the fact that less than 1 percent of Netflix subscribers play one of its mobile game offerings on a daily basis. The company has been working to expand its gaming capabilities to other devices, launching a test of cloud gaming functionality last year, and is mulling ways to generate revenue from games, the Wall Street Journal reported this month, potentially including in-app purchases and advertising within games.

Citi’s Bazinet, for one, expects that if Netflix does make an M&A play, it will be for a game publisher that can supply it with popular IP. The company has already acquired a few independent game studios but has yet to cross the Rubicon of a major M&A transaction; doing so would underscore the seriousness of its gaming ambitions while giving it additional material to exploit for film and TV franchises.

It would also complicate Netflix’s position on Wall Street, however, to return to the issue of the company’s narrative. Investors accustomed to following a simple story of subscriber totals and straightforward subscription and ad revenue growth would suddenly have to contend with numerous other factors — in-app purchase revenue, game development costs (which can be massive) and title downloads, to name a few.

Such are the considerations Netflix’s leadership is undoubtedly weighing as Ted Sarandos & Co. ponder the streamer’s next moves. Ultimately, to state the obvious, those moves will depend on what Wall Street most wants to see from the company, be it continued topline revenue growth, more ad dollars or another large influx of subscribers. But one thing is clear: Victory in the streaming wars will not bring peace for Netflix.