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Netflix: A Company At A Crossroads

Netflix
NFLX
has hit media headlines dozens of times in recent weeks, with each move the company makes seemingly contradicting the last. From (anti-) comical controversies to a dystopian horror, each decision has also played into the company’s share price, which has seen it catapult to new all-time highs. Let’s see what all this recent media coverage means for investors. 

Beating Expectations Isn’t Always Enough

Some of the most recent news coverage revolves around Netflix’s Q3 earnings report, released on Tuesday to the disappointment of some investors and analysts. By Wednesday, shares had slumped 2.3% in premarket trading, though Thursday made up the loss with gains of 4.5%. 

Somewhat unusually for the company, although the third quarter beat expectations far and wide, many investors don’t believe they beat it by enough. For instance, Deutsche Bank analyst Bryan Kraft downgraded Netflix’s rating, noting that, though he shared Netflix’s enthusiasm for future growth, he believes that the subscriber beat was “already more than priced into the stock.”

However, other analysts, including J.P. Morgan’s Doug Anmuth, believe that the stock has a way to go yet. He reiterated his overweight rating for the stock, stating that “ho-hum” earnings after the company’s recent rally may be “healthier” for the stock’s year-end prospects. 

So, what was Netflix’s sin that led to such mixed prospects? The company’s subscriber roster, projected to see 3.84 million new additions in the quarter, raked in a total of 4.4 million worldwide, marking the first positive subscriber gains in the last six months. However, only 70,000 of those came from the United States and Canada.

Still, Netflix’s subscriber numbers are impressive in a competition-saturated landscape, especially amidst the typical end-of-summer slump. The company also reported total revenue of $7.4 billion, with quarterly profit of $1.4 billion, touting assertions that Netflix is poised for strong Q4 performance. 

Netflix credits a more normalized content release schedule for its gains compared to the past six months’ backdrop of Covid-related production delays. But there’s one standout credit in particular that Netflix wishes to congratulate: Squid Game

The Success of Squid Game

If you haven’t yet heard – and that seems unlikely at this point – Netflix’s Squid Game is a fictional South Korean dystopian drama that took the world by storm following its 17 September debut. The show follows desperate contestants in search of cash playing children’s games to win cash prizes. The catch? Those who lose the games lose their lives, too. 

Unsurprisingly after a year of shifting wealth, massive death tolls, and international shutdowns, Squid Game became massively popular in days. Netflix noted in its Q3 report that Squid Game alone was responsible for a substantial subscriber uptick in the latter half of the quarter. 

To date, at least 2/3 of the company’s 213 million global customers, or 142 million subscribers, have watched at least two minutes of the show. 89% of those went on to watch at least one full episode. (In fact, the show became so popular that a South Korean internet provider sued Netflix on claims that the series singlehandedly led to unprecedented network traffic surges.) 

Squid Game holds astronomical implications for the company, as the show is expected to generate nearly $900 million in impact value for Netflix. The series launch was the company’s biggest ever, blowing even Bridgerton out of the water in terms of popularity. 

Squid Game also represents the potential for Netflix’s international growth, combining increased revenue with decreased production costs. Already, Netflix plans to spend $500 million developing content in South Korea alone, where subscribers topped 3.8 million last year.

…And the Controversy of Dave Chappelle 

However, Netflix has been forced to balance the success of Squid Game and the “disappointment” of its Q3 earnings success against a growing controversy surrounding a once beloved figure: Dave Chappelle. 

The Black comedian, renowned for the incisiveness of his groundbreaking Chappelle Show, has faced backlash since the 5 October premiere of his latest standup special, The Closer. Critics, advocates, and even Netflix’s own employees have criticized the special as being transphobic as the self-described “team TERF” member spouted off several derogatory remarks about gender and transgender women’s genitals. 

The backlash led to the firing of one transgender Netflix employee, B. Pagels-Minor, for purportedly leaking “confidential, commercially sensitive information” about the special to Bloomberg. The report noted that Netflix spent $24.1 million on The Closer, rivaling the company’s $24.1 million spending on hit show Squid Game

Wednesday’s Walkout

Following the controversy, as well as internal unrest after several employees claimed they were suspended for voicing their criticisms on social media, hundreds of Netflix’s in-person and remote employees staged a walkout organized by “Team Trans.” 

The protestors called for Netflix to remove the special and commit to release more “intersectional” content. Protestors also demanded more transgender representation in the creative pipeline, onscreen, and in the boardroom, as well as measures of harm reduction” and disclaimers to flag certain types of content. 

Rally speakers included Joey Soloway, creator of the Emmy-winning comedy “Transparent,” as well as event organizer Ashlee Marie Preston. The event also garnered support from a number of transgender and allied celebrities, including The Umbrella Academy’s Elliot Page and The Matrix writer and director Lilly Wachowski

Netflix’s Response

Many critics and employees also accused Netflix co-CEO Ted Sarandos of not doing enough to address the concerns of employees and the trans community after his initial comments downplayed the special’s potential for harm. 

In an internal email, Sarandos commented that, “With ‘The Closer,’ we understand that the concern is not about offensive-to-some content but titles which could increase real world harm (such as further marginalizing already marginalized groups, hate, violence, etc.) While some employees disagree, we have a strong belief that content on screen doesn’t directly translate to real-world harm.”

But following public outcry, Sarandos has since walked back his comments, stating in comments to Variety that he “screwed up that internal communication” and “should have led with a lot more humanity.” Additionally, he admitted that “storytelling has real impact in the real world.” 

However, Netflix – and Sarandos – stand by Chappelle’s controversial statements, noting that they don’t believe The Closer “falls into hate speech.” For now, despite employee and community protests, the special stays. 

Investors’ Takeaways

Currently, Netflix stands at the crossroads of unprecedented unrest and subscriber growth. 

As the company taps the international market for more content, more stories, and more paid subscriptions, its waning North American subscriber adds shows it will have to push beyond its domestic borders to generate continual revenue increases. 

At the same time, Netflix is in a tricky place concerning The Closer’s backlash and public activism. If it does give in to its critic’s demands, it will expend more time, money, and effort toward a championed cause, which net greater appeal. Not doing so risks the company being labelled transphobic and tone-deaf and could lead to drooping subscriber numbers and boycotts. 

As an investor, then, you’re also caught at a crossroad. Netflix boasts astonishing growth in the last 12 months, with stock market gains roaring toward 35%, outpacing even the S&P 500’s historic 31.7% gains. And with the broader market teetering on the edge of greatness or collapse – depending on your analyst of choice – it could seem high time to sell out and take your gains.  

However, if there’s one thing Netflix has proven time and again, it’s that its creativity, limberness, and willingness to push the envelope in times of distress lead to great gains – if not now, then in future quarters. Despite protests and backlash, Netflix’s stock continues to rise because, at the end of the day, investors know that this stock will perform (eventually). 

Typically, it’s best practice for traders to scuttle out of the way of a scandal until the dust settles to see where a company lies. And with Netflix stock continuing to rise despite its controversies, it appears that, once again, that advice holds true. Waiting until the backlash dies down and the stock slumps off its latest high, rather than charging forward based on a short-term market rise, will likely net better gains long-term.

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