Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Roku (ROKU) and Netflix (NFLX) are Data Companies

Netflix (NFLX) is not an entertainment company, instead Netflix is a big data company.

To explain, I think the true value at Netflix is the data it harvests from the subscribers. For example, Netflix knows what shows and movies people actually watch. That’s valuable data both advertisers and entertainment companies will pay for.

In particular, Netflix can track TV viewers on a level that old-time network executives could only dream of. To elaborate, back in the 1980s, networks gathered data from a few viewers by hard wiring expensive boxes to people’s TV sets.

Before that, there was no way to know what people were watching. They could take surveys, but many people could lie on the surveys. For example, a person could say he was watching Masterpiece Theater when he was really watching wrestling.

Data is the True Value at Netflix

Today, people pay streaming services such as Netflix (NFLX), Roku (ROKU), Disney+ (DIS), and Amazon Prime for the privilege of harvesting their data. Netflix’s value, in particular, comes from its ability to harvest more and more data.

Netflix has lost that ability and much of its value. To explain, on 20 April 2022, Netflix admitted it had lost 200,000 subscribers between January and March 2022. Furthermore, Netflix management admitted their platform could lose another two million subscribers in April and June 2022. Mr. Market responded by paying less for Netflix.

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Photo by Roberto Nickson on

On 19 April 2022, Mr. Market paid $348.61 for Netflix shares. The next day, Mr. Market paid $226.19 for Netflix shares on  202 April 2022. By 27 June 2022, Netflix’s share price fell to $189.14.

Unlike many investors, Mr. Market understands that Netflix is a Big Data Company. Netflix’s true value is the ability to collect data from 221.64 million viewers worldwide.

Netflix Shrinks

Until the first quarter of 2022, Netflix’s subscriber base was growing. Statista estimates Netflix’s subscriber base grew from 213.56 million viewers in the third quarter of 2021 to 221.84 million in the fourth quarter of 2021. Netflix’s subscriber base fell to 221.64 million in the first quarter of 2022.

Nor is it just Netflix’s subscriber base that has shrunk. Netflix’s movie library shrank by 35% between May 2015 and May 2022, What’s-On-Netflix estimates. The number of Netflix movies fell from 4,751 to 3,016 in that period. If you subtract Netflix’s originals, the movie library shrank by 55% in seven years.

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Photo by Pixabay on

In other words, there’s less stuff to watch on Netflix which generates less data. The reasons for the shrinkage are many, including other companies taking content off Netflix. For example, Disney pulled Marvel shows from Netflix and Paramount is pulling Star Trek shows from Netflix.

Why Netflix Wants Advertising

To counter the shrinkage, Netflix Co-CEO Ted Sarandos says his company is discussing an advertising deal with Roku (ROKU), Reuters reports. 

One reason for the advertising deal is that Netflix is exploring a cheaper subscription offer to grow its subscriber base. Interestingly, Reuters reports Netflix (NASDAQ: NFLX) has abandoned plans to buy Roku.

Roku had 60.1 million active accounts in the fourth quarter of 2022, Cord Cutters News reports. In fact, Roku claims “Roku’s U.S. active account base surpassed the U.S. video subscribers of all the cable companies combined.”

I think Roku is growing because it offers cheap and free alternatives to satellite and cable television. To explain, Roku offers a device people attach to their TVs. The device, streams video from many sources and much of Roku’s programming is free. Roku also offers fast access to cheap streaming services such as Netflix (NFLX), Disney+, Paramount+, and HBOMax.

Thus, Roku provides thousands of hours of free content for one payment of around $40 or less if you buy your Roku at Walmart.

 Roku Loses money

Interestingly, Roku (ROKU) is losing money despite the growing subscriber base. For instance, Roku reported its first quarterly operating loss (-$23.49 million) in over seven months on 31 March 2022.

Moreover, Roku’s quarterly revenues fell from $865.33 million on 31 December 2021 to $753.70 million on 31 March 2022. Similarly, Roku’s quarterly gross profit fell from $363.19 million on 31 December 2021 to $346.68 million on 31 March 2022.

Conversely, Stockrow credits Roku with a revenue growth rate of 27.78% in the quarter ending on 31 March 2022. The revenue growth rate fell from 33.15% on 31 December 2021 and 50.54% in the quarter ending on 30 September 2021.

Conversely, Roku can generate some cash. It reported a quarterly ending cash flow of $2.237 billion on 31 March 2022. There was a quarterly operating cash flow of $110.99 million on 31 March 2022.

Hence, it is easy to see why Roku’s management is trying to negotiate an advertising deal with Netflix (NFLX). The company needs additional cash.

Is Netflix Making Money?

Netflix (NFLX) is making money. It reported quarterly revenues of $7.868 billion, a quarterly gross profit of $3.583 billion, and a quarterly operating income of $1.972 billion on 31 March 2022.

Netflix can generate enormous amounts of cash. For instance, Netflix reported a quarterly ending cash flow of $6.035 billion and a quarterly operating cash flow of $922.84 million on 31 March 2022. Netflix had $6.009 billion cash and short-term investments on 31 March 2022.

Netflix is growing. Stockrow credits Netflix with a 9.84% revenue growth rate on 31 March 2022. Netflix’s revenues grew from $7.709 billion on 31 December 2021. In contrast, Netflix’s quarterly gross profit grew from $2.470 billion and the quarterly operating income grew from $631.77 million on 31 December 2021.

Netflix proves data collection from streaming video is a lucrative business. However, I think Netflix and Roku will have a hard time competing with the leader in streaming video. That leader is YouTube which had 2.562 billion users in January 2022, Statista estimates.

YouTube has the power of Alphabet (GOOGL) behind it. I consider Alphabet the largest and most lucrative big data company. I cannot see how Netflix and Roku can compete with YouTube. Notably, Alphabet had $133.97 billion in cash and short-term investments on 31 March 2022.

In the final analysis, I think Netflix’s stock price will fall as long as Netflix subscriber base shrinks.