Is Netflix’s Pandemic Boom Over? Analysts, and Even the Streamer Itself, Think So

NEWS ANALYSIS — Heading into Netflix’s first-quarter fiscal results on April 20, market speculation regarding the streamer’s subscriber growth dominates.

Following a year, 2020, in which Netflix added a record 37 million subs, conventional wisdom suggests the SVOD pioneer can’t replicate, much less exceed, last year’s Q1 sub increase of 16 million subs.

London-based Ampere Analysis and Los Angeles-based analyst Michael Pachter contend Netflix added 6 million subs worldwide through March 31 — the lowest sub gain in four years. Of course, that’s playing it safe, considering Netflix itself has projected the same conservative sub growth.

That’s a smart move, since Netflix short-sellers typically salivate ahead of earnings, hoping for bad news — only to be dashed at the gallows when positive results come out.

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“It is not quite the end of the pandemic effect for streaming services, but we are beginning to see the tail end of it; it’s definitely on the wane,” Richard Broughton, analyst at Ampere, told The Guardian. “If Netflix’s numbers do come in as predicted, they will be the lowest for a good few years.”

Netflix ended 2020 with slightly more than 203 million subscribers and expects to end the first quarter of 2021 with 209.6 million subs. The service added 41% of subs from Europe and the Middle East.

“We’re becoming an increasingly global service, with 83% of our paid net adds in 2020 coming from outside the [North America] region,” co-CEOs Reed Hastings and Ted Sarandos wrote in the company’s Q4 shareholder letter. “The quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy.”

Pachter says Netflix has executed “extremely well” during the pandemic by keeping its “foot on the gas pedal” for subscriber growth, while benefiting from a disruption in content production that allowed it to generate — for the first time — positive free cash flow.

“While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its [market] valuation,” the analyst wrote in a note.

Netflix continues to successfully fend off growing competition from Disney+; increased content spending from Amazon Prime Video; and pending European launches of HBO Max and Paramount+. As warmer weather arrives around the world and pandemic restrictions on social gatherings ease due to vaccinations, the number of consumers interested in binge-viewing the latest U.K. serial drama might wane.

“Netflix went into the pandemic as the strongest service, and although there has been the arrival of very successful new entrants such as Disney+, it is [still] in an extremely strong position now,” Broughton said.

Amazon Upped 2020 Content Spend 41% to $11 Billion

Among streamers such as Netflix, Disney+, HBO Max, Hulu and Peacock, Amazon Prime Video remains relatively under the radar when it comes to publicized content spending.

So when founder/CEO Jeff Bezos released his final shareholder letter April 15, the world’s richest man threw out a lot of big numbers befitting a company tagged on Wall Street as No. 1 in market valuation. Not to be overlooked in the data dump: $11 billion in content spend on movies, TV shows and music in 2020. That’s up 41% from $7.8 billion in combined content spending in 2019.

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Netflix spent $11.8 billion on content in 2020, which was actually down almost 15% from $13.9 billion spent in 2019.

Amazon in recent years reduced content production as it focused monies on high-profile license agreements such as “NFL Thursday Night Football,” according to analyst Michael Pachter with Wedbush Securities in Los Angeles. He says Amazon is positioning to resume releasing original content at a steadier clip, as it had in the past. Amazon Studios recently installed a new, more comprehensive TV development team in place.

“We view [the move] as a way [for Amazon] to remain relevant in the face of heightened competition from various other streamers,” Pachter wrote in a note.

Separately, Bezos said the e-commerce pioneer created $126 billion in “value creation” economic benefit to consumers in 2020. He said most Amazon consumers complete 28% of their online purchases in three minutes or less, and half of all purchases are finished in less than 15 minutes.

When compared to the typical shopping trip to a physical store — driving,
parking, searching store aisles, waiting in the checkout line, finding your car, and driving home. Bezos said research suggests the typical physical store trip takes about an hour.

“If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that’s more than 75
hours a year saved,” Bezos wrote.

Indeed, when valuing the time saved shopping through e-commerce at $10 per hour, Bezos estimates the average Amazon Prime member created $630 in annual “value creation” for themselves. A tally that skyrockets to $126 billion when multiplied by 200 million Prime members.

“That’s important,” wrote Bezos.

Analyst Pachter: ‘We Have Been Consistently Wrong About Netflix’

Netflix has been on a roll since the pandemic began, and that’s unlikely to change anytime soon, says analyst Michael Pachter.

Pachter, media analyst with Wedbush Securities in Los Angeles, has been a longtime bear on Netflix’s stock, contending the SVOD juggernaut’s fiscal success is overstated, and glosses over significant shortcomings such as debt and free cash flow.

With Netflix set to release first-quarter (ended March 31) fiscal results after the market’s close on April 20, Pachter April 15 issued a note admitting the streamer continues to defy naysayers with or without a pandemic.

Michael Pachter

The analyst says Netflix will add 6 million subs worldwide in Q1, bringing its global base to about 210 million — data points that reflect Netflix’s own guidance.

“We have been consistently wrong about Netflix,” Pachter wrote. “Netflix has executed extremely well during the pandemic, surprising us by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in content production schedules that allowed it to generate positive free cash flow.”

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Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, FCF is the cash left over after a company pays for its operating and capital expenditures.

Indeed, free cash flow, or the lack thereof, has been a persistent sore point for Pachter, who argues Netflix regularly spends exorbitantly more each quarter than it generates. Since 2018, Netflix has generated more than $3 billion in annual negative FCF.

Then came the pandemic, and the streamer in 2020 produced its most successful fiscal year ever, generating $25 billion in revenue and adding nearly 37 million new subs.

Pachter now believes Netflix will generate $1 billion a year in positive FCF through 2030 — a projection the analyst contends still does not support the streamer’s $540 share price value. Pachter said he believes Netflix shares should be priced at $340.

Optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote. “We reiterate our ‘underperform’ rating on shares of Netflix.”

Analyst: Netflix Paying Sony $1 Billion For Movie Rights

Netflix’s big distribution deal with Sony Pictures for exclusive streaming access to new theatrical and original-produced movies beginning in 2022 is expected to cost the SVOD behemoth more than $1 billion, according to media analyst Michael Pachter. Netflix and Sony did not disclose financial details of their landmark agreement, which supplants Sony’s long-time distributor (since 2006) Starz.

“This is meaningful for Netflix as many of its earlier exclusive licensing deals have expired, the content pulled back by studios such as Disney and WarnerMedia seeking to shore up their competing streaming services,” Pachter wrote in an April 12 note.

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The agreement comes as other studios pull content from Netflix for proprietary services. MGM-owned Epix and MGM have opted for an exclusive partnership with Paramount+, while NBCUniversal is considering pulling content from both HBO Max and Netflix to shore up its Peacock service, while potentially leaving some of its content available to co-owned Hulu on a non-exclusive basis.

“While these are clearly exceptional times and exhibitors are willing to negotiate terms they typically would not have in a pre-COVID environment, we think these types of negotiations will continue, and we expect to see more original content from streamers playing in theaters post-pandemic,” Pachter wrote. “We think exhibitors are now more willing to negotiate favorable terms with far more flexible windows than they had in the past, as long as their counterpart is willing to pay.”

Indeed, the analyst contends Netflix acted proactively as studios continue to hold back major tentpole titles due to the pandemic. With many lower-budget movies slated for release last year shifted to streaming to recoup production budgets, most larger budget titles have been pushed back to later this year or into 2022. Despite the expected July 9 theatrical bow of Disney/Marvel’s Black Widow, and exhibitors in some markets, including Los Angeles, expanding seating capacity to 50% from 25%, Pachter says the exhibition industry is not expected to “normalize” until this summer at the earliest as more moviegoers get vaccinated.

“Attendance levels will not materially improve until tentpole titles return to theaters, and studios clearly prefer the lower risk of releasing tent-pole titles when vaccine s should be widely distributed in the U.S. and Europe,” wrote the analyst.

Analyst Michael Pachter: Breaking Windows Destroys Value

Michael Pachter thinks the right thing for studios to do after the pandemic subsides is to reopen some windows.

Speaking at a DEG: The Digital Entertainment Group virtual presentation March 24, the Wedbush Securities media analyst said the way for content owners to get the most from their content is to once again have a theatrical window, along with several others in which they can maximize the value of content.

“It is suboptimal if a consumer spends the same amount of money … and subscribes to five services and consumes three times as much content,” he said. “Somebody loses. So the creatives can’t get paid and the publishers of their content can’t get paid if the total pie stays the same and people consume more. So it’s in the best interest of everybody in the value chain to maximize profit, which means theatrical, followed by PVOD or VOD, followed by DVD, and then make the streaming guys wait three years.”

He isn’t keen on the moves by several studios of late to send first-run theatrical releases to their streaming services concurrently with theatrical release, and he thinks it shouldn’t last.

“I think that if the world ever returns to normal, and that’s a 2022 prospect at the earliest, but if the world returns to normal, I think greed is going to thrive,” he said. “I think that the studios are going to maximize the theatrical window again, maybe that’s a 45-day window and not a 70-day window, but you’re going to have [a theatrical window] for a while. You have to remember all the constituencies involved in creating film. Directors like to win Best Director, and actors like to be on ‘The View’ and they like to be on ‘Access Hollywood’ and they like to measure their success in terms of box office. So when you release a movie like Bird Box direct to Netflix, what does everybody get paid? It’s impossible to actually track how much revenue that generated. Ultimately, everybody who works in this industry is motivated by getting paid for their hard work and the best way to get paid is to maximize revenue.”

Disney’s strategy of Premier Access on its streaming service (with an additional fee) for first-run films is a short-term phenomenon, he contended.

“I don’t think they’re going to see any meaningful spike in subscribers, that they are going to abandon this pretty quickly,” he said, noting, “Honestly, nobody is signing up for Disney+ to see Black Widow, period, or Mulan or Raya.”

WarnerMedia’s scheme to send all of its first-run films to its streaming service HBO Max for a year “was an overcommitment,” he said.

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“If you remember a famous HBO product, ‘Game of Thrones,’ we can say, ‘You know nothing, [AT&T CEO] John Stankey,’” Pachter said. “That guy knows nothing about anything. And I’m a big fan of Jason Kilar, and he’s I think in charge of the studio at HBO Max. … My bias is that AT&T bit off way more than they could chew when they bought Time Warner. They’re trying to package HBO Max and sell it and maybe later sell the studio, and I think they’re doing everything they can to make the HBO Max asset worth a lot because they think they’re going to get a Netflix multiple on that, so I think they’re making bad decisions for the creatives and for maximizing profit for the content by shoving it onto HBO Max. I really think that’s where that’s all coming from, but again It’s hard to get in the head of somebody who actually doesn’t know what they’re doing, so it’s hard to second guess. I don’t think the guy knows what he’s doing. I don’t think he has a clue — in way over his head.”

Analyst: Theatrical Return Could ‘Normalize’ in July

With President Biden predicting 1.5 million daily COVID-19 vaccinations nationwide by mid-spring, the return of the domestic box office could be right around the corner. Wedbush Securities media analyst Michael Pachter believes the box office could “normalize” as early as July as vaccinations roll out, and virus infections/deaths decline.

“We maintain that most people will remain reluctant to attend the movies until they receive their vaccine, or in the case that the
transmission rate significantly falls,” Pachter wrote in a Feb. 22 note. “Simply stated, we do not expect attendance levels to begin to normalize until July at the earliest.”

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Pachter contends AMC Theatres and Cinemark have taken the right precautions — installing high-quality air filtration systems, implementing enhanced cleaning and disinfecting protocols, reducing seating capacity, and block seating to preserve social distancing. Regal, which remains shuttered, has taken similar steps.

The analyst bases much of his optimism on the strong return of the Chinese box office — the second-largest in the world — which saw a major boost from a record Lunar New Year weekend with action comedy Detective Chinatown 3 opening to $393 million.

“Chinese box office bodes well for Imax, global theatres post-COVID,” Pachter wrote. “There was clearly pent-up demand in China as audiences returned en masse once theaters re-opened, and in Q4 Imax revenue was down only 4% YoY in the region. Through Feb. 14, Imax is trending up 471% from [the previous-year period].”

That said, Pachter estimates the Q1 U.S. box office is trending
down 93.6% through Feb. 21, with ticket sales down 88.1% year-over-year, and 2021 trending up 122.5% over 2020 (down 59% over 2019). More than 50% of theaters in major markets remain closed.

“We expect 2022 to return to 2019 levels on pent-up demand for long-delayed films,” he wrote.

PVOD Resonating With Consumers; Jury Still Out for Hollywood, Pundits

Premium video-on-demand, the expensive version of transactional digital movie rentals offering consumers in-home early access to theatrical titles, continues to see a renaissance.

With 65% of major theatrical markets shuttered due to the pandemic, new data through Feb. 1 saw $19.99 PVOD releases Greenland (STX Entertainment), News of the World (Universal Pictures), Promising Young Woman (Focus Features), The Croods: A New Age (Universal/DreamWorks Animation), Our Friend (Gravitas Ventures) and Fatale (Lionsgate) rank among the Top 10 digital movies rented by consumers across Apple TV, FandangoNow, Spectrum TV and Google Play.

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After a failed 2011 attempt by Universal Pictures to jumpstart PVOD by offering actioner Tower Heist directly in the home for $59.99, the distribution channel made a less-expensive ($19.99) comeback last year early in the pandemic when the studio disclosed it had generated $100 million in revenue from 5 million transactions in 28 days offering erstwhile theatrical sequel Trolls World Tour directly to consumers at home.

Thus, Universal took PVOD firmly by the horns, hammering out shortened theatrical window agreements with AMC Theatres and Cinemark in order to get its movies into home entertainment channels faster — and with good reason. Studios keep about 80% of all digital transactions, compared with 50% of theatrical.

“The results for Trolls World Tour have exceeded our expectations and demonstrated the viability of PVOD. As soon as theaters reopen, we expect to release movies on both formats,” said NBCUniversal CEO Jeff Shell.

Indeed, Universal released the Judd Apatow comedy The King of Staten Island on PVOD in June. It also rushed out early transactional VOD access to The Invisible Man, The Hunt, Emma and Never Rarely Sometimes Always, among others.

Other studios have tepidly followed, with Warner Bros. Pictures debuting Scoob! on  May 15, and Disney launching Mulan into the home on Labor Day weekend  — the latter initially as a $29.99 purchase-only option to Disney+ subscribers.

“The silver lining to 2020 from a theatrical perspective is that studios have had the opportunity to test the feared PVOD window, with the results not as compelling as many had expected, and not as damaging to the exhibitors as feared,” Michael Pachter, media analyst with Wedbush Securities in Los Angeles, wrote in a note.

Indeed, as PVOD has become normalized, scant information exists about actual sales generated by consumers. Nielsen recently announced it would begin tracking PVOD across living room televisions. Just released industry data from DEG: The Digital Entertainment Group did not include PVOD transactions among the $2.3 billion consumers spent renting movies and other filmed content through digital retailers in 2020 — up from less than $2 billion in 2019.

“We think that PVOD is here to stay, and it really is a big part of our business,” Fandango SVP Mark Young told a recent industry panel. NBCUniversal-owned Fandango operates transactional VOD services Vudu and FandangoNow.

Yet major theatrical distributor Imax believes PVOD remains a fluke driven by rollercoaster consumer behavior during a pandemic.

“To be unequivocal, PVOD is a failed experiment,” CEO Rich Gelfond told a virtual investor confab last September. “The numbers haven’t worked in a pandemic, so how would they work in a non-pandemic? Of the movies that were postponed, very few went into PVOD or streaming, and I should be clear I’m talking about the blockbuster movies — the movies that Imax does.”

Wedbush’s Pachter contends studios largely agree, continuing to postpone major releases into 2021 and later, showing they prefer a theatrical release over PVOD.

In the meantime, more movies are likely to go to subscription VOD platforms flush with cash and willing to spend it licensing content.

“We expect more films to shift to streaming as subscription services seek more video content after heightened consumption [and subscriber growth] coupled with several months of halted productions in the pandemic,” Pachter said.

GameStop Meets Social Media Investor Mob

When GameStop, the world’s largest video game retailer, started the year less than a month ago, its stock was trading around $19 per share — underscoring the market’s ongoing concern about packaged-media gaming in the digital age.

But that lull has been blown to pieces over the past few days as speculative at-home investors took to social media platform Reddit and began playing up the stock to some of the platform’s 3 million users. In the process, GameStop shares skyrocketed 1,700% to $347 per share, triggering mandatory trading stops by Nasdaq in an attempt to keep the stock, and the market, stable. The stock was up 8,949% (!) over the past 12 months.

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“You combine the power of technology, which allows you … to magnify your individual impact, with some use of leverage and very targeted bets, they can have a significant influence, particularly on areas of vulnerability because of the short positions,”  Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC.

GameStop shares sank early on Jan. 28 as trading platforms including Robinhood and Interactive Brokers restricted trading in the video game retailer. The stock opened at $265 a share and briefly rose to $483 before plummeting to $112. As of 11:45 a.m. EST the stock had rebounded to $225.

The frenzy has defied some Wall Street hedge funds and analysts unaccustomed to seeing day-traders on social media trigger a “short squeeze,” which occurs when a stock skyrockets quickly in value, forcing short sellers (including hedge funds) who had bet that the stock price would fall, to buy again in order to forestall even greater losses. It’s a cruel trading strategy magnified by “mob rule,” with some participants looking for paper wins at the expense of others.

“This is gaining cult-like status,” said Quincy Krosby with Prudential Financial. “It is a pack of traders and the pack is gaining momentum. The retail crowd is not just taking over the shorts and it’s taking over the headlines.”

Indeed, GameStop has been the biggest trending retail market story this week. Longtime video game analyst Michael Pachter contends GameStop is well-positioned to be a primary beneficiary of the new PlayStation and Xbox consoles from Sony and Microsoft, respectively. The video game industry concluded a record 2020 that saw revenue explode to $57 billion, with December sales up 25% due to the new consoles.

“We remain quite optimistic that [GameStop] will return to profitability by fiscal-year 2021,” Pachter wrote optimistically in a Jan. 11 note.

Fast-forward to the present and Pachter shakes his head at the craziness while maintaining a “neutral” rating on the GME stock he values at $19 per share.

“It’s just a feeding frenzy,” Pachter said in a media interview. “There’s nobody in this stock based on fundamentals.”

Indeed, recent fundamentals saw GME worldwide sales results for the nine-week holiday period, ended Jan. 2, increase 4.8% in comparable store sales and 309% in e-commerce sales. But total sales declined 3.1%, driven by an 11% decrease in GameStop’s store base due to a planned “de-densification” strategy, temporary store closures around the world due to pandemic-related government mandates, and lower foot traffic in stores.

“The guys buying [GME shares] at $300 think some greater fool will buy at $400, and so far the greater fools  keep showing up,” Pachter said. “It’s a pyramid scheme.”

Sen. Elizabeth Warren (D-Mass.), a longtime advocate for stricter Wall Street regulations, says the uproar from institutional investors about GameStop trading is disingenuous in the face of the investment industry’s long history of questionable self-dealings and operating counter to actual economic concerns.

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said in a Jan. 27 social media post.

Netflix Stock Opens at Record High Following Record 2020 Report

As expected, Netflix shares opened Jan. 20 up nearly 14% to a record $573.43 per share following the previous day’s 2020 fiscal report that underscored the the streaming behemoth’s market dominance. The service saw a record 37 million new subscribers, record revenue of nearly $30 billion and profit of $2.76 billion.

The SVOD topped 203 million paid subscribers for the first time, driven by a global market eager to consume content at home during the ongoing pandemic. Nowhere was that more prevalent than in North America — Netflix’s first and most-saturated market. The streamer added more than 850,000 subs in the U.S. and Canada — well above the projected 300,000+ subs.

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“Importantly, while Netflix beat subscriber expectations in all major territories, Netflix’s most mature market U.S./Canada reported materially better than expected, which highlights that the ultimate penetration for Netflix’s services globally could be higher than anticipated,” analyst Jeff Wlodarczak with Pivotal Research Group wrote in a note.

Moving past the headlines, Netflix appeared to turn the page on what has always rankled some on Wall Street: free cash flow, or the cash left over after a company pays for its operating expenses and capital expenditures. Netflix historically has operated in the red, to the tune of $1 billion or more.

But in its fiscal 2021 guidance, Netflix said cash flow is moving toward a breakeven level at around $1 billion, an impressive turnaround driven in part by reduced spending due to the ongoing pandemic. Then the kicker: Netflix believes it no longer needs to raise external financing for day-to-day operations.

“Netflix has been working toward this moment for multiple years, and is now in the unique position to continue its aggressive content spend, while still generating significant future cash flows,” Jefferies analyst Alex Giaimo wrote in a separate note.

Longtime Netflix bear Wedbush Securities media analyst Michael Pachter, in a Jan. 20 note, said service “has consistently surprised us” by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in production to generate positive free cash flow.

“While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation,” Pachter wrote.

The analyst lauded Netflix’s pledge to be free cash flow positive through 2030. Rather than continuing to borrow to finance its content needs, Pachter said it has become clear that Netflix has reached a point where it can maintain a healthy balance sheet and finance operations from operating cash flow. He still contends the stock remains overvalued.

“We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote.

Analyst Predicts 1 Million Fewer New Q4 Netflix Subscribers

Netflix is projecting subscriber growth of six million for the fiscal period ended Dec. 31, 2020 — topping 201 million subs worldwide. Michael Pachter, media analyst with Wedbush Securities in Los Angeles, said he believes that tally will come in about 1 million less at 5 million, including 300,000 in North America, largely due to recent price hikes.

“We think this is likely given the price increase implemented in late October … [where] standard monthly subscription fees went to $14 from $13 and premium fees went to $18 from $16,” Pachter wrote in a Jan. 14 note. The analyst contends the price hike will up revenue to $6.6 billion from guidance of $6.57 billion.

The longtime Netflix bear notably marveled at Netflix’s ability to keep the content pipeline fresh during the pandemic when most production in Hollywood was shut down. Specifically, Pachter cites Netflix adding foreign content across markets, cross-promoting new genres to audiences, and purchasing/reviving dormant franchises such as “The Karate Kid” (“Cobra Kai”) and “Full House” (“Fuller House”), among others.

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“Netflix’s experience in adapting foreign content to new markets has resulted in the company maintaining its content quantity lead over its competitors,” Pachter wrote. “We expect that lead to be sustained for the foreseeable future.”

If there was a silver lining during the pandemic, shuttered content production accelerated Netflix’s path to generating positive free cash flow — long a sore spot for Pachter. Free cash flow typically represents the cash a company generates after accounting for fiscal outflows to support operations and maintain capital assets. Pachter is guiding $2 billion free cash flow in fiscal 2020.

But the flush FCF could be quickly erased after Netflix announced production/distribution of more than 70 original movies in 2021 — enough content to release at least one new original movie every week.

“This is an ambitious and costly goal, particularly as the service is touting its ‘A’-List-driven content,” Pachter wrote. As a result, the analyst expects Netflix to reach break-even by fiscal year 2022 as content consumption normalizes, subscribers grow and content spend again ramps higher.

Netflix reports Q4 results at market close on Jan. 19.