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Netflix: Is the Risk Worth the Reward?

Netflix (NFLX) has witnessed extremely impressive growth over the past years. The pandemic-related restrictions have been a boon for the video streaming platform as more consumers shifted towards video-on-demand services. Netflix saw a significant increase in its subscriber growth both in the U.S. and worldwide. 

However, the global market is now saturated with several other players. Consequently, Netflix is becoming more reliant on price rise to drive in better margins and higher income. Therefore, I am neutral on this stock.

Although the near-term prospects look good, it is the long-term prospects of Netflix that should worry investors. The streaming platform cannot continue to resort to price hiking measurements. In such a scenario, it needs to figure out how to manage the amount of investment that it must make to create relevant and high-quality content. 

Therefore, growth investors must be aware of how shaky Netflix’s long-term prospects appear. 

Let’s check it out in detail. (See Netflix stock charts on TipRanks)

Tougher Competition Might Impact Long-term Growth

Increasing competition is one of the major threats that can ruin the company’s future prospects. Netflix will face significant organic competition from various major players such as Apple (AAPL), Amazon Prime (AMZN), Disney+ (DIS) in recent years. 

The on-demand video streaming services launched by these players had seen growth rates similar to those Netflix saw when it started out. Consumers now have a plethora of content from which to choose. 

With increased competition, Netflix would find it difficult to hike the prices. Moreover, Netflix is primarily a video streaming company. The different divisions of its business do not have the ability to generate revenue. However, most of its rivals, such as Amazon, Disney, and Apple have other segments which can provide cash to help them keep subscription charges lower. 

Therefore, these direct competitors would be able to attract more subscribers in the upcoming days. This might compel Netflix to keep its prices down, thereby impacting its performance. 

Entry into Video Game Market Might be Risky for the Stock

Netflix announced on July 20 that it would be entering the video game market. It intends to start with mobile video games and move forward from there. The company had long considered gaming as one of its major competitors. 

Netflix would be offering free mobile games to its subscribers initially. There were roughly 136 million mobile gamers in the U.S. in 2019. This figure is expected to jump to 156 million by 2025. 

Although subscribers are happy with this move, investors aren’t exactly enthusiastic. This is because Netflix’s foray into the video gaming market comes with certain risks. For one, Netflix is primarily an online video content streamer. Focusing on online games will lead to diverting time, effort and investment from its core content segment. 

Moreover, it would be impractical to believe all 209 million Netflix members would be video game enthusiasts. Thus, rising prices for high-quality video games might potentially lead to subscriber exit.

Uncertainty in the Long-term 

Netflix stock isn’t at all overvalued at the moment. The company earned $2.97 per share on sales of $7.34 billion in Q2. However, for Q3, it expects to earn $2.55 for each share on sales worth $7.48 billion. 

On the other hand, the long-term prospects look a bit worrisome considering the risk factors that might materialize. Much will depend on how the company increases prices or how the subscriber growth takes place.

What Analysts are Saying about Netflix Stock

As per TipRanks analysts rating consensus, NFLX stocks is a Moderate Buy. Out of 30 ratings, there are 20 Buy, 7 Hold and 3 Sell recommendations. 

The average NFLX price target is $601.85, implying a 1.9% upside. The stock price target lies between a low of $342 per share and a high of $700 for each share. 

Bottom Line

Investors looking for long-term growth should be aware of the risks and challenges that the company might face in the future. Indeed, investors need to be cautious with this mega-cap tech stock. 

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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