What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing before we jump into today's video. I want to thank the daily upside for partnering with the channel. The daily upside is a free business and finance newsletter that i actually use every morning to help get an edge on the latest business news check out the link in my bio to subscribe for free. The past 12 months have been a disaster for high flying tech stocks with kathy wood's flagship arc etf down more than 50 from its highs.

The market carnage has expanded to the mega cap fan companies which had previously propped up the entire market on thursday january 20th. The video streaming company netflix released earnings results falling far short of analysts expectations. This caused the stock to fall by more than 100 wiping out most of its pandemic. Error gains.

This might seem surprising at first netflix has become almost ubiquitous in recent years, has completely disrupted the cable tv industry. If netflix's 222 million global subscribers made up a country, it would be larger than brazil and they have turned themselves into. Perhaps the most well respected motion picture producers in history. Their netflix original squid game show garnered 1.65 billion streaming hours in its first month of release and they won 7 oscars in 2021, the most of any movie studio.

It looked as if the company was unstoppable and they reached a market cap of 300 billion at the peak, but since then the stock has lost more than 40 of its value. It appears that netflix has finally become a victim of its own success. For the better part of the past decade, netflix was a near monopoly in the streaming space and was thus able to build a dominant position as a category leader, but over the past couple years things have changed. Disney warner, media, nbc and discovery have all started.

Investing billions in their own streaming platforms, which directly compete with netflix in their most recent earnings. Call netflix for the first time admitted that competition was becoming more fierce and weighing on their subscriber growth for the first quarter of 2021. They expect to only add 2.5 million new paid subscribers or less than half of the 4 million. That analysts had expected.

The market seems to fear that the video streaming industry will become a hyper competitive, doggy dog environment, where none of the major players will be able to make high profits in this video. We'll look at how netflix grew to become the dominant video streaming company, why their stock price fell by 20 percent and what this means for the company going forward. But before i go any further, i want to thank the daily upside for partnering with us on this video as a content creator, i'm always trying to keep up to date with recent events in the stock market and economy, you can spend hours browsing through google and Reddit reading about the stock market, the problem is the vast majority of finance articles are generated by ai or biased career journalists. That's why.

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It's about a five-minute, read that isn't afraid to dive into the hot topics and give real high level unbiased analysis with the occasional dose of wit, to keep things interesting. As someone who looks to stay on top of the news to help create videos like this, i can't recommend them enough click, the link in my bio and join the 200 000 other people that read the daily upside every morning and the best part is it's absolutely Free and now back to the video founded by mark randolph and reed hastings in 1997, netflix pioneered the online video rental business. In the early days, internet technology wasn't advanced enough to support hd streaming, so they would ship physical cds to their subscribers mailboxes throughout the 2000s. They had some success, but there's a limit to how big you can achieve by running a cd delivery service.

The netflix we know today was born in 2007 when they launched their online streaming service at first. They only had the rights to about 1 000 movies, and most of them were not blockbusters. If there was a specific movie that you wanted to watch, there is only a slim chance that it was on netflix, but over the years they started investing more and more on content. They would license content from established film studios, such as paramount pictures and lionsgate.

In the beginning, the established media companies thought that netflix was a great thing in 2011 time warner. Ceo jeff buch said that he welcomed netflix's ability to monetize older content that was no longer generating revenue for them. They didn't view direct to consumer video streaming as a threat to them at all. Netflix was completely dependent on them for content.

If they wanted to crush netflix, all they would have to do is stop selling them. Their old movies and tv shows. If netflix really wanted to become the world's dominant media company, they would have to start producing their own content and that's exactly what they started doing in 2013 at first, the hollywood establishment didn't take them too seriously. How could a technology startup take on heavyweights like warner, media and mgm studios, but over time the quality of their original series became better and better? Their orange is the new black show has garnered 105 million unique viewers since its launch.

In 2013., more than 60 million people have watched the first season of tiger king and more than 100 million people have watched squid game. Their strategy of producing original content was extremely successful. In 2013 they had 41 million subscribers by 2021. This had increased five-fold to more than 220 million, so how were they able to grow so fast? It's because they developed a superior value proposition to the customer at the time most households paid anywhere from 60 or, in some cases, all the way up to 120 dollars per month for cable or satellite tv, despite costing so much the user experience.

Isn't all that great? You can only watch shows that happen to be playing at that moment. If you won't be home for a specific episode of a show, you have to set up a dvr in advance to record it. And finally, you are inundated with an ungodly amount of ads, and if you wanted to watch a movie, you would either have to buy it or rent it from somewhere else like redbox netflix offers. A wider range of content allows you to watch.

The shows on demand. Has a smart recommendation, engine no advertisements and in the beginning it only cost eight dollars per month. When you offer superior product at one tenth of the cost of cable television, it shouldn't come as any surprise that hundreds of millions of people would cut the cord and switch to netflix, of course, to achieve its success. Netflix needed to invest billions of dollars every single year.

The good thing is that they benefit from economies of scale. It doesn't matter whether you have 10 000 subscribers or 10 million subscribers. The production cost for squid game is the same as their subscriber count increased. They had more and more money to invest in new content, which attracted even more subscribers in a virtuous cycle.

This has allowed them to grow at 26, compound annual growth rate since 2005 and report positive net income in every single year. But if they're doing so well, why is their stock price falling like a rock it all comes down to competition for years, netflix was pretty much a monopoly in the video streaming market. The established media companies like disney and comcast didn't make their own streaming services because they feared that it would cannibalize their legacy. Cable tv businesses.

It was similar to how the legacy automakers dragged their feet to switch to electric vehicles as they didn't want to disrupt their internal combustion engine business as more and more people switch to netflix. They no longer have any need to pay 100 per month for cable tv. The number of households who have a traditional tv plan has been declining every single year since 2016.. This trend was accelerated by the lack of live sports during the pandemic by 2019.

Disney ceo bob igers saw that espn and some of their other cable tv channels were steadily losing circulation as a result of cord cutting. He realized that netflix was now too big to ignore. If he wanted disney to stay relevant, he would have to start competing with them directly. To this end, they acquired 20th century fox for 71 billion dollars, which is one of the biggest acquisitions in the entire history of the media industry.

They combined their existing disney pixar, star wars, marvel and fox content into their over-the-top disney plus streaming service disney plus, would become the most formidable competitor to netflix. Disney plus has more than 100 million subscribers warner. Media's hbo max has almost 75 million nbc's peacock has more than 50 million. It will be much harder for netflix to keep increasing its subscriber count.

Now that consumers have so many other options in their most recent quarterly report. They said the competition has intensified over the past 24 months as rival entertainment companies release their own streaming. Services. Importantly, this is one of the first times that netflix has directly admitted competition is eating into their subscriber growth.

Under the backdrop of increasing competition, they release subscriber growth guidance, which fall far short of analysts expectations. This chart shows accumulative net subscriber additions for the past four years. As you can see, they got a huge boost in 2020, as people started using netflix during the pandemic. 2021 was also pretty good, with almost 20 million ads, but 2022 is tracking on the lowest level in the past four years.

This is a very concerning trend. It comes on the heels of a recent announcement that netflix will be increasing its prices in the us. Their standard plan will see a 1.50 per month, hike a two dollar increase for its premium plan and one dollar increase for its basic plan. This amounts to a roughly 10 increase, given that the landscape is becoming more competitive.

Raising prices could dampen their subscriber growth even further, but it's important to put these price increases into perspective. The consumer price index is up seven percent from a year ago, so they're pretty much just keeping up with inflation. The big question is whether or not they can grow their subscriber count with so much new competition. Also, they may be forced to spend more heavily on premium original content to keep their audience engaged and make sure they don't defect to competitors with the recent 40 drawdown.

Netflix has given back almost all of its gains since the beginning of the pandemic, but is this reasonable? They are still the dominant global streaming company by a large margin. Disney plus is their most significant competitor, but even they have a content library that is only about 20 of the size of netflix's. There are only so many marvel movies and disney cartoons that you can watch before getting bored netflix's content library is the only one that is big enough and diverse enough to provide a one-stop shop where you can binge for hours other than competition. A bigger problem for netflix's saturation as of march of 2020 59 of us adults said that they are either currently subscribed to netflix or share a password with someone who does and remember that this was pre pandemic.

That number is much higher now, no matter how good that netflix's content is, there's a limit to how much they can grow in the u.s. Just because most people who want netflix already have it the majority of their future revenue. Growth in the us market will probably come from increasing prices, as opposed to gaining new subscribers. Netflix is also expanding aggressively into foreign markets, where they are still underpenetrated to do this.

They will have to continue spending billions of dollars per year on local language content, which they don't have as much experience in netflix is still the dominant streaming company in the world today, however, given how saturated they are in the us, as well as increasing competition, their Revenue growth will likely slow down significantly from the 26 annual growth rate that we've seen over the past 15 years with a stock price down 40 from the highs, a significant deceleration in growth is probably already factored into the share price. Alright guys that wraps it up for this video, what do you think about netflix? Do you think the 20 decline after earnings was an overreaction? Let us know, in the comments section below also don't forget, to check out the daily upside link in the description below. As always, thank you so much for watching and we'll see you in the next one wall, street millennial signing out.