Netflix (NASDAQ: NFLX) surprised investors with a strong third-quarter showing, which saw paid subscriber additions soar past 2 million. The platform’s popular crime drama, Dahmer – Monster: The Jeffrey Dahmer Story, has quickly become one of the most-streamed shows on the internet. Though investors feel upbeat about recent earnings, we feel that its net additions were primarily driven by the hit show rather than customer loyalty to the platform. Hence we are bearish on NFLX stock.
Netflix’s stock has been beaten down in the past year, suffering from a perfect storm of rising competition and comparisons against pandemic years. Consequently, its stock is down roughly 50% year-to-date.
Netflix’s subscriber losses earlier in the year contributed to its stock’s dismal performance. It lost 200,000 subscribers in the first quarter, followed by an even bigger loss of 1.2 million subscribers in the following quarter. The results had its investors running for the hills, as it was the first time in over a decade that the platform lost subscribers.
The company’s reliance on a few hits has left it vulnerable to churn from lower-income users, who are likely to resubscribe only before big releases. That presents a major problem for the company as we advance, with its competition breathing down its proverbial neck. Though it will remain a major player in the streaming world, it won’t have the same luster it did in the past. Its reliance on just a few high-hit series to maintain its popularity makes it an unattractive long-term wager.
Netflix Relies Too Heavily on Hit Series
Netflix’s net additions of 2.4 million subscribers exceeded expectations by a huge margin. However, its net subscriber growth appears to have a strong link to the performance of a few high-impact series. Therefore, customers are susceptible to subscribing only before a major hit series is released. Moreover, with inflation and interest rates rising, it’s getting incredibly tough for consumers to maintain subscriptions.
Netflix has grown its business by reinvesting in new content, attracting users, and retaining those already signed up. Nonetheless, it’s having difficulty balancing the need to keep up with rising content prices and maintaining affordable packages for its users.
Netflix has outpaced its competitors by tapping into customer insights and creating content people enjoy. However, the company’s position as king of streaming is under threat due to rising competition from new and established businesses. Platforms such as Disney+ have the advantage of having a core legacy entertainment business to fall back on. Netflix doesn’t have that luxury, and the rising cost of producing content puts immense pressure on its bottom line.
Is NFLX Stock a Buy?
Turning to Wall Street, NFLX stock has a Moderate Buy consensus rating. Out of 31 total analyst ratings, 14 Buys, 14 Holds, and three Sells were assigned over the past three months. The average NFLX price target is $291.16, implying a 4.59% downside potential. Analyst price targets range from a low of $162 per share to a high of $375 per share.
Conclusion: Competition Will Make Things More Difficult for NFLX Stock
Netflix may have been the first to market with streaming video, but now it’s competing against giants. These competitors have multiple revenue streams, which makes it relatively easy for them to invest in new content. The streaming behemoth relies on a few hit series to boost subscriptions which is a worrying long-term sign.
The company is banking on new ad-based plans that could potentially add a revenue stream for the business. However, it could potentially result in price-conscious customers switching from their current plan to a cheaper one to save money. Netflix’s management is optimistic that new subscribers will be driven by the ad plan, which will offset these losses. They also predict that high-margin sales from advertisements will make up for the losses.
Considering its valuation, we still believe that NFLX stock is trading unattractively despite the massive price drop. It trades at over 118 times forward cash flows and 26.8 times earnings. Though it is down substantially from its historical averages, NFLX should be trading at significantly cheaper multiples. Things will only get troublesome ahead, and we expect it to lose more value in the upcoming quarters. Therefore, it’s best to stay on the sidelines.
