Netflix is ‘still very much in play and ahead of the game’: Santosh Rao - Yahoo Finance

Santosh Rao, Head of Research at Manhattan Venture Partners, joined Yahoo Finance Live to talk Netflix's Q1 earnings and his outlook for the company.

Video Transcript

SEANA SMITH: Let's talk about another big story today in the markets. And that, of course, is the Netflix earnings that we just got out a few minutes ago. Taking a look at the stock reaction after hours, shares off just around 10%. And we were seeing that reaction because of the huge miss that Netflix posted in subscriber growth, reporting 3.98 million new subscribers.

So we want to bring in Santosh Rao for a little bit more on this. He's head of research at Manhattan Venture Partners. And Santosh, going into this report, we knew it was going to be very, very tough comparisons on a year over year basis. Yet, in terms of what Netflix had advised or what we were expecting, compared to what we got today, a huge miss here for Netflix. What's your interpretation just in terms of what this means for future growth for the company?

SANTOSH RAO: Yeah, so I mean, what you're seeing in this quarter's numbers is really a combination of pull forward, COVID, and everything, the stay at home and all of these things. So you saw the big numbers, the banner year that 2020 was. You saw all that, all these subsequent forward. I think 1Q, you saw a little bit of miss because of that. But I think looking forward, I think this is a fundamentally good story since I think, overall, this company is well situated. It's going to be cash flow breakeven this year and cash flow positive for the rest of the-- for starting 2022. So on a fundamental basis, on a balance sheet basis, on a liquidity basis, it's a very strong company.

Yes, in terms of streaming, even in competition, they're way ahead of others. That's the company to beat. The others still have to catch up. They still have pricing power. So, a lot of things in favor of them. Yes, there is competition. It'll show up in the second half of the year most likely. But they are very strong in content. They're spending less. They're getting more content. So they are well positioned. So I think this I don't think is a cause for concern. Yes, a miss will be punished in this market when they're all priced so well coming off a banner year. But I don't think it's some reason to panic. The story is fundamentally still intact.

ADAM SHAPIRO: And yet, Santosh, we had a guest just on just before you who said that the jig is up for Netflix. And I have to tell you, a lot of us are just fans. I mean, incredible programming, whether it's "Schitt's Creek" or "Queen's Gambit." But how do they keep up in the race to spend ridiculous amounts of money for that content?

SANTOSH RAO: No, actually, they're not spending that much. I mean, it has really come down-- yes, they are spending, but they're producing good content. They have good go-to content, especially, and especially in the international market, with the localized content, they're very popular, very well received. And they have tremendous pricing power, tremendous marketshare and mindshare. So I don't think the gig is off.

That's been the bear case with Netflix all along. It's overpriced. They can't do it. They cannot fund themselves. The company has come out and said they can fund themselves. They're not going through the debt market. They have enough cash flow to fund their own shows. And so-- and they have a good library already. They've benefited from COVID, in fact, compared to the competitors, because they had a good slate already. So I think they have a good lead. It's their market share to lose. It's their-- I think they have everything right now to keep their competitive advantage right now. That's my saying. So I don't think the gig is up yet. They're still very much in play and ahead of the game.

SEANA SMITH: Santosh, what about the crackdown on password sharing? Because we heard that Netflix was kind of testing this out. We haven't really heard an update since then. Do you think Netflix is actually going to crack down on password sharing? And then what does that mean for the future of, I guess, these subscriber numbers? Do you think it would actually help things? Or do you think it could potentially hurt Netflix?

SANTOSH RAO: I think it'll help them. I mean, if you read some of the surveys-- and I was reading a few surveys out there-- they said roughly 45% of their base has-- shares their password. So I think if they have to go out and have their own subscription, I think that's a net additive to the total subscriber base. So I think it can-- it'll be net additive overall once they start enforcing it. Initially, they might see some hesitation, but overall, I think when you have Netflix and you see the content on there-- and subscription subscriber service, the way we consume content now has changed.

I don't know if theaters are coming back. And if they are, it's going to take a long time. People are comfortable watching. And if there is good content, people will come to you. And Netflix has been delivering on that front. Excellent content, and no one can match there. And there are others there as well. But they can hold their own as now.

ADAM SHAPIRO: We hear how positive you are, but when we get the next round of Disney Plus growth, isn't that going to be another negative for them? Isn't that going to be kind of another cut from 1,000 wounds?

SANTOSH RAO: Yeah, I mean, it's there. I'm not saying competition is not there. And [INAUDIBLE]. I think all these companies, competitors' game came into the arena last year, essentially. So this will be the first full year, essentially, where they'll be competing with Netflix. So we'll see the competitive impact in the second half of this year, I would say. So it's-- so they have to-- and Netflix cannot rest easily, rest on their laurels. They really have to execute. There is competition nipping away at their heels. So they have to be cognizant of that.

And they know that. They knew it all along. They have this great deal with Sony that they just signed a five-year deal. So they get content from there. They have licensing from them. So I think that's an addition to their own in-house content. So I think they're doing their thing. And they will maintain their competitively. Disney is a competitor, but I think Netflix can hold their own, if they continue to execute as they are right now.

SEANA SMITH: Santosh Rao, always great to get your perspective. Thanks so much for hopping on here and reacting to Netflix's earnings with us. Again, shares off just around 10% right now in the week of those--

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