Netflix is feeling the pressure of the streaming wars

Key Points
  • Netflix's Q4 2019 showed slowing domestic subscriber growth and weak guidance for the current quarter.
  • The pressure of new competition in streaming is weighing on Netflix, and the company responded with a mix of fuzzy metrics and optimism that it can stick with its strategy of investing heavily in content to grow its subscriber base.
  • Netflix investors weren't convinced on Wednesday, and the stock was down about 2%.
Robert De Niro, Al Pacino and Ray Romano star in Martin Scorsese's "The Irishman."

The pressure is weighing on Netflix.

The company reported earnings Tuesday, showing disappointing guidance for the next quarter and lower-than-expected new subscribers in the U.S., its most mature market. The stock was down about 2% by midday Wednesday.

Netflix's quarterly letter to investors didn't offer much more confidence either as competition in streaming heats up, with Netflix stuffing in some fuzzy stats about its subscribers' viewing habits and popularity of its latest slate of shows and movies. And that's before the next round of streaming service launches this spring and summer from AT&T's HBO Max and Comcast's Peacock, which will feature content from NBCUniversal.

Meanwhile, David Einhorn of Greenlight Capital told clients in a letter Tuesday that his firm added to its short position in Netflix, calling the company's growth story "busted."

It wasn't all bad news though. Netflix is making good on its promise to reduce its cash burn, even though it continues to increase its spend on content each year. And subscribers are growing at a nice clip internationally, where Netflix faces less competition at the moment.

All in all, it's a mixed bag for Netflix early on in the year, and Tuesday's earnings report has shaken investors' confidence this week.

Here are the key takeaways from Netflix's Q4 2019 earnings report:

Fuzzy stats. There was a whiff of desperation in some of the data Netflix shared in its letter Tuesday. The company announced it changed the way it counts views on the service. Now, instead of counting a "view" as a subscriber watching 70% or more of a show or movie, Netflix stops counting after the first two minutes. The company said measuring views that way puts it on par with other online video platforms like Google's YouTube.

But YouTube and other free video platforms are much different than Netflix. Counting a view after two minutes makes sense for them because that's long enough for a viewer to get an ad served to them. Netflix doesn't have advertising, and relies on subscribers staying glued to their screens for as long as possible. Even with the new counting method, Netflix said views were up an average of 35%.

Then there was that odd Google Trends chart Netflix plopped into the letter that was meant to demonstrate the popularity of its new show "The Witcher" versus shows on new rival platforms like Disney+'s "The Mandalorian" and Apple TV+'s "The Morning Show." Putting aside the fact that a Google Trends chart isn't the best way to measure interest in a TV show, Netflix used a global version of Google Trends to make its comparison, even though Disney+ was only available in the U.S. and Canada. Netflix said 76 million member households watched "The Witcher" in December, but it's impossible to gauge how popular it really was if those views were based on just a minimum of two minutes.

Competition affected domestic subscribers. It looks like the November 2019 launches of Disney+ and Apple TV+ took its toll on Netflix in the U.S. and Canada. Netflix said its recent price increases and "competitive launches" in the quarter caused its "low membership growth" for the quarter. (Netflix only added 550,000 subscribers in the U.S. and Canada versus the 1.75 million it added in the year-ago quarter.)

That could spell trouble for Netflix as its rivals expand across the globe.

Netflix will stay ad-free. Netflix also reiterated that it would not incorporate advertising into the service as a way to generate more revenue or offer cheaper plans. CEO Reed Hastings had a rational explanation for that too. Hastings said on the earnings call Tuesday that he doesn't think Netflix can compete with the dominant digital advertising companies like Google, Facebook and Amazon. Plus, Hastings said he's not into the idea of leveraging customer data to target advertising.

Cash burn is improving. Netflix spends billions on content each year, which funds both its original programming and shows and movies it licenses from third parties. The fear around Netflix has been that it won't be able to keep its spending under control. But the company did show its cash burn has cooled off. Its negative free cash flow was $1.7 billion for last quarter, and it expects negative free cash flow to be $2.5 billion for all of 2020. Even more promising: Netflix made good on its claim that its cash burn peaked in 2019.

No "Friends," no problem. Netflix's execs were asked on the earnings call Tuesday about the loss of "Friends" to upcoming rival HBO Max. While "Friends" was believed to be one of the most popular shows on Netflix, Chief Content Officer Ted Sarandos said subscribers find other things to watch when a popular licensed show leaves the service. (Although he didn't provide any data to back that up.)

The bottom line: Netflix's mixed earnings report showed the company is sticking to its strategy of investing more and more in content, with the aim of growing its subscriber base. But as the competitors start to light up their own streaming services, it has a renewed pressure to prove it can compete.

Disclosure: Peacock is the streaming service of NBCUniversal, parent company of CNBC. Comcast is the parent company of NBCUniversal.

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