July 21, 2021
NEWS ANALYSIS — Netflix’s recent behind-the-scenes maneuvering to establish a foothold in mobile video gaming isn’t sitting well with longtime Wall Street bear Michael Pachter. The Wedbush Securities media analyst, who specializes in video games, for years has considered Netflix shares overvalued, underscoring his sentiment with the streamer’s erstwhile (until 2020) negative free cash flows.
Thus, while Netflix reported $1.8 billion in second-quarter (ended June 30) operating income, the service burned through $175 million in free cash on content. Netflix generated $899 million in free cash in the previous-year (pandemic) period.
Free cash is the amount of money a company has left over after paying for operating expenses.
Pachter says that as Netflix burns cash, it is expanding content offerings to include lower cost podcasts and video games, as the former is relatively inexpensive to produce. Gaming is a different ballgame — one that has seen many high-profile players enter and stumble.
“We think this is not smart [by Netflix],” Pachter wrote in a July 21 note.
To be sure, the gaming market is booming. Through the end of May, total revenue of hardware, games and accessories was up 17% to $24 billion from $20.5 billion in the previous-year period, according to The NPD Group.
While Netflix says it will initially focus on mobile games, Pachter questions whether the SVOD pioneer has any idea how difficult the mobile games business has become. The business graveyard is littered with the corpses of content companies that have failed at making mobile games, with Disney the most prominent failure.
“Video game publishing [heavyweights] like Activision, EA, Take-Two, Ubisoft and Nintendo have tried for years to create compelling mobile content, and each has had lasting success only through acquisition [of content],” Pachter wrote.
The analyst wonders why Netflix hired gaming veteran Mike Verdu to spearhead the venture — claiming the executive hasn’t produced games in about 20 years.
“While [Verdu] worked for mobile developers, his experience is limited, given that Zynga produced its first mobile game after he left the company, Kabam was sold only two years after he arrived, and he was at EA during a period of no growth,” Pachter wrote.
Netflix expects to create games based on its intellectual properties such as “Stranger Things” and “Bridgerton,” among others. Pachter says only one TV show in the past 20 years has morphed into a successful video game: “The Walking Dead.” Successful movie franchises translated into strong-selling games are largely limited to “Spider-Man,” “Harry Potter,” “Star Wars” and “Lord of the Rings.”
“If [Netflix] hopes to monetize its valuable television and movie IP, it would be less costly and more effective to follow Disney’s example of licensing its content to competent [game] creators,” Pachter wrote.