Netflix (NFLX 1.73%) has long been the king of streaming and that has made it a market darling, but some are starting to wonder if its reign may be near an end.
The conflicting opinions among investors are, of course, what drives the stock price to change day to day. Differing views fight for supremacy over questions like, is this streaming giant losing its grip? Are its glory days behind it? Can Netflix make a comeback? Is well positioned for long-term success?
Let's look at its recent performance and also explore some risks investors should know about before deciding whether to invest in Netflix.
The streaming market is increasingly competitive
In the past few years, the streaming industry saw a significant jump in available services. With the rise of several new (as well as some already established) players such as Walt Disney's Disney+, Warner Bros. Discovery's Max (formerly HBO Max), Paramount Global's Paramount+, Amazon Prime, and Comcast's Peacock, entertainment seekers found themselves with plenty of options to consider. The services all offer diverse options, including original content, sports, and live programming, which might resonate more with audiences than the offerings available on Netflix. As a result, some viewers began to switch to these platforms (while many opted to subscribe to multiple platforms).
The image below illustrates the increasing number of competitors that managed to attain a measurable share of U.S. TV screen time in 2023 compared to 2021. Additionally, Alphabet's YouTube emerged as a significant streaming player, surpassing Netflix in overall screentime.
Image source: Netflix.
To better compete against these added services, Netflix raised its monthly subscription prices in recent years to fund more original content. That made it more expensive for subscribers to maintain their memberships. The increase in price likely contributed to Netflix starting to lose some subscribers in 2022.
Investors got concerned about this leveling off of subscribers (and the revenue growth slowdown it created) and started selling off shares in the first half of 2022.
Netflix is still a significant player in the streaming market, but management knew by the end of 2021 that it was facing severe challenges. To address these challenges, Netflix management needed to make some changes. The company needed to find a way to manage in this new era of increased competition and attract the added subscribers that had been the driver for interest from investors.
Netflix has plans to reaccelerate growth
One plan Netflix initiated to expand its subscription base and revenue that saw immediate results was adding a paid sharing feature. Paid sharing lets members pay an extra fee so an additional household can use Netflix on a current account. In the second quarter of 2023, Netflix expanded paid sharing globally in countries representing over 80% of its revenue base. The initiative was a likely contributor to Netflix adding 5.9 million global subscribers in Q2 of 2023 (it lost almost 1 million subscribers in Q2 of 2022).
Netflix is always looking for ways to keep its viewers hooked. One way it does that is by investing in more original content for viewers to look forward to. Because it operates in so many countries, Netflix is also producing content in different languages in more than 50 countries to cater to differing tastes worldwide. It's likely this initiative is boosting subscription numbers. But it also gives the global audience reason to think Netflix caters to more than just English-speaking audiences, which can help differentiate its content from competitors. Additionally, creating content in other countries likely helps Netflix save money. The cost of producing content in the U.S. can be high. Producing in other countries allows Netflix to make more content with its existing budget.
In a 2023 initiative, Netflix moved to launch a cheaper ad-supported subscription plan. It's hoped that this alternative will help the company reaccelerate revenue over the long term by:
- Making the service more affordable for some subscribers. This could attract new customers who couldn't afford the service before as well as encourage current subscribers who were considering dropping the service to keep their accounts.
- Allowing it to generate more revenue from advertising, which could offset the loss of income from some subscribers who switch to the cheaper plan.
- Making the company more competitive with other streaming services.
Finally, Netflix's efforts to be a video game platform (launched in late 2021) will help with long-term revenue growth by tapping into a large and growing market. Statista estimates the gaming market at $384.9 billion this year and says it will reach $521.6 billion by 2027.
So there are multiple reasons why those bullish on the company believe it can maintain robust subscriber growth and reaccelerate revenue.
Why some investors are wary
After the company reported its second-quarter 2023 earnings on July 19, the stock price fell 8%. Investors punished the company for two reasons.
First, Netflix's average revenue per membership (ARM) disappointed investors. ARM declined 3% year over year (or a loss of 1% when you factor in currency exchange rates). Even worse, management projects ARM to be flat to slightly down in the third quarter (now underway). Investors are concerned about Netflix's lackluster ARM forecast because it could indicate its pricing power is waning and its near-term revenue growth may keep stalling.
Second, management gave disappointing revenue forecasts for the third quarter, confirming some investors' fears that the company may be having difficulties reigniting growth. Additionally, investors were concerned that management's projected revenue growth of 7% year over year for the third quarter didn't justify the stock's elevated valuation.
So is the party over for Netflix?
This company has risks, including an elevated valuation, increased competition, and slowing growth. Management has plans to address these risks, but it's not yet clear if the instituted plans will work. Given this uncertainty, if you're not already a shareholder, there are likely better investment options available at the moment that have the potential to yield higher returns over time.
