July 16, 2020 / 9:42 PM / in 24 days

Breakingviews - Netflix is still the pointiest FAANG

The Netflix logo is seen on their office in Hollywood, Los Angeles, California, U.S. July 16, 2018. REUTERS/Lucy Nicholson

NEW YORK (Reuters Breakingviews) - For Netflix investors, reality bites. Netflix’s subscriber growth is slowing, and boss Reed Hastings has decided to share his chief executive role. That was enough to knock around 10% off the streaming service’s stock in after-hours trading on Thursday. But even after a 60% share price rise this year, well ahead of Facebook, Alphabet and Apple, Netflix is still the sharpest FAANG.

The $230 billion firm added more than 10 million subscribers during the second quarter, compared with analyst estimates of 8 million, according to Refinitiv. The problem is that momentum is flagging as people emerge from lockdowns. Netflix reckons it will hook just under 3 million more net subscribers by the end of September. That made Thursday a poor time to announce the elevation of Chief Content Officer Ted Sarandos to the clunky position of co-CEO. What’s arguably sensible succession planning – Sarandos is one of the most powerful producers in Hollywood – can also look from the outside like a founder getting ready to follow other pursuits.

Still, it’s mainly a story of high expectations. Netflix’s stock this year has surpassed other high-flying tech kin Facebook, Apple and Alphabet, whose search engine Google gives the FAANGs their “G”. Only Amazon.com, which has proved an essential service during the pandemic, rivals Netflix’s rise. And some correction may be healthy. The company trades at 67 times estimated earnings for the next 12 months. If Covid-19 hadn’t virtually stopped production, Netflix would have burned cash this quarter, and for at least the next year.

True, customers have expanding choice, which makes it harder to garner new eyeballs. Sport franchises are preparing to get back into action. The U.S. National Basketball Association and Major League Baseball intend to air games soon. And rival services are finally getting off the ground. Comcast launched its streaming service Peacock on Wednesday. AT&T unveiled HBO Max in May. Unlike other FAANGs, Netflix hasn’t aroused the ire of antitrust watchdogs, but that’s because it lacks their obvious dominance.

Even so, Hastings’ firm has gained ground that it’s unlikely to give up. A looming recession, or slow recovery, could lead consumers to cut back on spending, but it’s not Netflix that will lose from that. A survey conducted for MoffettNathanson found that tight finances are the top reason people ditch pay-TV – and pick up streaming services like Netflix. Hastings’ creation still hasn’t lost its bite.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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