Netflix is the latest company to experience a stock loss, but it was far from unpredictable if you were tracking the key fundamentals. In particular we explore issues with Netflix’s Market Positioning and Guidance that surfaced about a year ago in our Key Drivers, foreshadowing their recent drop.
Five years ago, Netflix Inc. (NFLX) began a rocket ship ride for investors, soaring in price. Over the last few months, share price has receded in value to where it was 5 years ago, with the stock plummeting 35% on April 20th following their earnings release.
Earnings results noted slower subscriber growth and loss of subscribers, leaving the company to ponder incorporating advertisements in their streaming services to make up for lost revenues. Even prior to the earnings release, Netflix was in the news regarding curtailing password sharing, and raising prices in January. Their standard plan went up by $1.50, and the basic plan saw price increases of $1. Lastly, we have seen the rise of competing streaming services in the market as new popular content drives customers to other platforms.
Could any of this have been foreseen? The answer is yes, and also the reason why textual data, machine learning, and natural language processing are taking over the financial markets. We use the Key Drivers feature within our Insights Platform to examine the events contributing to the drop-off for Netflix.
For example, the Key Driver Netflix scores, which include Market Position scores and Guidance scores, have been erratic for several quarters and experienced notable declines in Q1 and Q2 of 2021.
Our NLP model was extracting negative commentary around an increase in competition going back to April 2021. Coupling these insights with added detail from one of our other Key Driver scores, Deception, provides additional meaning to these extractions. It shows us not only how the company is discussing these issues, but also how management is trying to avoid discussing them too broadly.
Question: “Just given the guidance and the beat during the quarter relative to guidance, sequentially the first quarter tends to be higher in net additions than Q4, but your guidance is lower despite the fact that you beat Q4 by relatively large amount and it feels like the pull-forward effect is more or less behind us.”
Answer: [Euphemism]: “There's just more short-term noise and uncertainty right now, but still very strong underlying growth metrics and that's what you're seeing in the Q1 guide.” — Spencer Neumann, CFO
Question: “Do you see any merit in what Amazon is doing in sports?”
Answer: [Evasion]: “I don't know particularly what they're doing.” — Theodore Sarandos, Co-CEO
In the above questions and answers, our Deception model picked up some problematic language. In the first question, the analyst had concerns about guidance and the company spokesperson would have the public believe that it is short-term noise. But as we can now see, those issues analysts pointed out with guidance were more than just short-term problems. In the second question, an analyst asked about Amazon’s new sports streaming offerings. The answer indicated that Netflix didn’t care or didn’t know what was going on in a fast growing market that other companies like FuboTV and Disney have capitalized on in recent years.
Netflix made a mistake, it seems, in assessing their competition and their customers. The market was evolving and adding new offerings. Companies like Disney that own a suite of content options through ESPN and Hulu, and Amazon were adding to their portfolios through acquisitions and streaming deals in the past few years. From these sentences our Key Drivers analysis highlighted, it is clear that Netflix seems to have lost sight of this. Just as Blockbuster was unseated by Netflix, the wheel turns and history often repeats itself. Markets are constantly changing and companies need to know how they fit into the ecosystem in which they reside. Nothing happens in a vacuum.
It is impossible for humans to read and comprehend both disclosures and news on companies with the speed, accuracy, and understanding that’s afforded under the AI umbrella by processing the language of business in real time. We particularly hear this from firms during earnings season. There is simply too much information distributed in a short amount of time.
Amenity’s NLP surfaces contextual sentiment driven by Key Drivers, and a fine-grained taxonomy that yields scoring in real time across market driving factors within a company context. Markets are dynamic. Key Driver scoring helps to take the guesswork out of the equation by providing analysis on earnings calls that are otherwise missed.
Can investors utilize ESG news sentiment to maximize alpha in the short and medium term between the intervals that are covered by ESG advisory firms, ratings agencies, and other peers? We investigated the relationship between short-term (weekly, monthly) and medium-term (quarterly) ESG news sentiment and stock returns. As the title suggests, our results indicate there is alpha, and we walked through the analysis. Watch it here.
Request a Key Drivers demo today to find out how you can discover thematic trends that drive performance as well as uncover areas of risk, exposure, and opportunity hidden in financial documents.
Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
Copyright ©2022 Amenity Analytics.
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