Netflix shares have traded higher after it posted better than expected result, losing ‘only’ 1 million subscribers, doing better than management’s guidance of a 2 million subscriber loss. While an early disruptor in the sector, and a huge benefactor from covid lowdown, these tailwinds are quickly waning and competition is intensifying.

The company expects ~$2 billion in free cash flow for 2022 and a significant increase in 2023 (we project ~$2.2Bn). This healthy projected increase in cash flow is due to management reigning in content spend to ~$17 billion annually, as the “content wars” slow down. We think investors should be breathing a sigh of relief on this news.

However, we view Netflix as a content company with a web platform. Netflix trades at ~19x forward earnings multiple whilst Paramount and WarnerDiscovery can be purchased for ~7x earnings. Additionally, Netflix is hampered by a lack of a content library -- both WarnerDiscovery and Paramount have extensive libraries going back decades, with solid franchises such as Star Trek, DC, etc. Netflix either needs to pay for content libraries or constantly generate new shows and movies. This puts Neflix at a constant disadvantage, and its previous advantage -- scale -- has been eroded as more consumers switch or add other services. Paramount+ added 4.9 million subscribers in this last quarter, and WarnerDiscovery added 1.7 million subscribers, bringing its total streaming audience to ~92.1 million. Netflix’s scale is no longer enough of a ‘moat’.

We downgrade NFLX from a HOLD to Under-weight.