Why Guggenheim Securities' Michael Morris is bullish on Netflix

Key Concepts

• Engagement: The amount of time spent with the Netflix platform, now a primary metric for evaluating core business performance.
• Intellectual Property (IP): Brands and existing content that Netflix leverages to stand out in a crowded market.
• AI-Generated Content: Content created using artificial intelligence, posing both potential efficiencies and competitive threats.
• Short-Form Content: Brief video content, often seen on platforms like YouTube, which could increase competition for viewer attention.
• New Revenue Streams/Engagement Opportunities: Netflix's efforts to diversify and expand its offerings beyond traditional streaming.
• Content Creator Partnerships: Collaborations with popular content creators from other platforms to produce Netflix content.

Netflix Q3 Earnings Expectations and Core Business Performance

Michael Morris, entertainment media analyst at Guggenheim Securities, discusses his expectations for Netflix's upcoming third-quarter earnings report. He highlights that while Netflix no longer discloses subscriber counts in the same way, engagement (time spent on the platform) has become the most crucial metric for assessing the core business. Morris anticipates an improvement in engagement trends for Q3, noting that while not poor in recent quarters, it hasn't met expectations given the strength of Netflix's offerings.

Drivers of Expected Engagement Improvement in Q3

Morris attributes the expected Q3 engagement improvement to a strong content slate. Key titles mentioned include:

• Squid Game (most recent season): Released late in June, contributing to the quarter's performance.
• Happy Gilmore: A film that performed well.
• Wednesday: A significant hit series.
• K-pop Demon Hunters: A major contributor on the film side.

Data sources, including company disclosures on top-performing titles, indicate strong and healthy trends, providing comfort in the core business's trajectory.

AI-Generated Content: A Threat or Opportunity for Netflix?

The discussion shifts to the potential impact of AI-generated content, particularly in light of OpenAI's Sora 2. Morris acknowledges this as a "huge" and uncertain factor with both pros and cons.

• Potential Pros: AI could lead to efficiencies in content creation.
• Potential Cons:
  • Increased Competition: If AI leads to more high-quality short-form content, it could create an incremental competitive threat, especially from platforms like YouTube.
  • Cutting Through Clutter: In an uncertain future, Morris believes platforms and brands' IP will be key to differentiating content. Netflix's strong platform and growing IP are seen as an opportunity.

Netflix's strategy to compete involves developing new revenue streams and engagement opportunities, with a focus on harvesting new creators.

Netflix's Strategy for Growth and Diversification

Morris elaborates on Netflix's proactive approach to growth, emphasizing that the company "never rests," a sentiment echoed by their co-CEOs. This is evidenced by several recent initiatives:

• Partnership with TF1 (France): For live content.
• Spotify Partnership: For exclusive video podcast content.
• Expansion of Games: Bringing mobile games to the TV screen to drive engagement.
• Acquisition of Top Short-Form Content Creators: To produce Netflix original content.

Future Predictions and Investment Outlook

Morris offers a specific prediction:

• Investment in the NFL: He anticipates Netflix will make a larger investment in the NFL in the next cycle, building on their existing Christmas Day games.

Overall, Morris expresses a bullish outlook on Netflix, seeing their continuous innovation and expansion as exciting for investors. He notes that the company is not resting on its laurels, which is a positive sign for future performance.