"Iceberg, right ahead!"
- Titanic, 1997
After months of preparation, we went live with the Communications Pro service earlier this week. Thank you to everyone who attended our kickoff call with Keith on Tuesday and signed up already! It is very exciting to finally share our Internet, Media, and Telecom sector research with a broader audience.
Click Here for Kickoff Call Replay.
I have big plans for the product. Some we previewed on the kickoff call, but most are still under wraps. Being a media analyst, I like to think I know what I am doing… but, ultimately, you will be the judge of that!
My attention is always on finding the right mix of timeliness and substance. The financial markets are dynamic, and there is a new headline every 30-seconds. My job is to focus on what matters - separate signal vs. noise. Let the process drive decision making. It is a lot easier said than done, I know. There is A LOT of noise out there!
Consistency is also essential. You must keep that flywheel going and avoid the dreaded “content gap” at all costs. That means keeping the pace of new ideas steady and staying on top of existing ones. It also means ALWAYS planning at least 6-months ahead.
To that end, we have put together a terrific lineup of 12 speakers in Q4. Including the Founder of YouTube’s international business and Head of Digital Development at Discovery.
But what happens if you fall headfirst into the content gap?
In the case of Netflix, we are about to find out. While COVID and stay-at-home orders turned out to be a big shot in the arm for subscriber growth, it also threw a wrench straight into the gears of their content flywheel.
COVID forced the shutdown of global production worldwide in March 2020, and it only began to resume at scale in September 2020 (6-month delay). Fortunately for Netflix, they operate on a 10-15 month lead and, therefore, have been able to draw down on their backlog of available content to keep things going. Unfortunately for Netflix, the production gap is set to catch up with them starting in December 2020 and will last through June 2021 (assuming no further production delays).
And whether you choose to believe it or not, Netflix is a hit-driven business. When Netflix releases tent pole series such as “Stranger Things” and “Money Heist” it brings in many new subscribers. While Netflix releases anywhere from 50-80 new original titles a quarter, it is only the top 10 that matter.
We have been keeping track of the production of Netflix’s most popular series in development. Lost in Space, The Witcher, Lucifer, Sex Education, You, Stranger Things… all delayed. And there are plenty more than just these.
Management brought up the issue in last quarter’s investor letter:
“Since our content production lead time is long, our 2020 plans for launching original shows and films continue to be largely intact. For 2021, based on our current plan, we expect the paused productions will lead to a more second half weighted content slate in terms of our big titles,”
For now, investors are ignoring the looming content gap despite the apparent warning signs. We think that will change as subscriber growth stalls out, and the company misses estimates.
Beware the content gap!
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.61-0.81% (bearish)
UST 2yr Yield 0.10-0.16% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,736-11,497 (bearish)
Tech (XLK) 111.13-119.04 (neutral)
REITS (XLRE) 34.70-37.54 (bullish)
Utilities (XLU) 57.75-63.98 (bullish)
Financials (XLF) 23.03-25.35 (bearish)
Shanghai Comp 3175-3350 (bullish)
Nikkei 220 (bullish)
DAX 128 (bearish)
VIX 25.05-29.96 (bullish)
USD 93.31-94.51 (neutral)
Oil (WTI) 37.20-41.73 (bearish)
Gold 1 (bullish)
Best of luck out there today,
Andrew Freedman, CFA
Managing Director – Communications