Should Netflix branch into gaming?
At the end of the conference call management said gaming is a real threat to attracting attention for video streaming of TV-series and movies. Netflix said that it will be an important form of entertainment going forward. Here is maybe the clue for Netflix’s future growth. If the company defines itself as more than a video streaming platform for TV-series and movies, then video streaming of e-sport is an obvious expansion of the business. Or even more bold, expand into gaming itself but here Netflix could quickly head into competition with other big technology platforms including Apple and Microsoft.
What is the free cash flow equilibrium?
If we assume that Netflix missed gaming completely like Microsoft initially missed the Internet and search engine technology, then Netflix will eventually be this big player in video streaming of TV-series and movies but with much slower growth rates and not being this growth story any longer. What happens then to the valuation and the stock price?
The key question is what Netflix’s long-term free cash flow generation profile looks like. The 12-month trailing free cash flow has gone from $-3.14bn in Q4 2019 to $2.46bn in Q1 2021 as content production has slowed down, but Netflix said that it expects to be at break-even for all of 2021 as content production ramps up again. Again, the question is, what is the necessary level of recurring content production to preserve the subscriber base? Nobody knows this yet, but it will turn out to be the defining moment for investors. Maybe we will know in a not-so-distant future.