Netflix (NFLX) has been in the news for all the wrong reasons. Its stock sank to its lowest levels in over four years after reporting a loss in subscribers in its first quarter. It’s now been two consecutive quarters with results below estimates. NFLX stock continues to be in a downtrend, with the market sentiment at a remarkably low ebb. I am neutral on the stock.
The company’s top-level management has blamed the lackluster performance on the suspension of services in Russia. If you take Russia from the equation, it will be looking at just a 500,000 sequential increase in subscribers. Moreover, it predicts another drop in subscribers by two million on a sequential basis in the upcoming quarter.
The somber second-quarter update suggests that Russia might not be the only problem. Additionally, co-CEO Ted Sarandos commented on the “heightened levels of competition” the business faces.
It appears that the cracks are now appearing in Netflix’s business model. Strong competition is eroding its market share and crippling its pricing power.
Subscriber Growth Will Continue Slowing Down
Netflix lost a healthy 200,000 subscribers during the first quarter, which came in considerably lower than its previous guidance of 2.5 million new additions. Additionally, it put forward another dreary report for the upcoming quarter, forecasting an over 2 million subscriber loss.
The contraction in subscribers will become a common occurrence for Netflix. We see how the competition, including HBO Max, Disney+, and other streaming platforms, is taking a sizeable chunk of the market. These competitors have deep pockets and will continue investing in original content to drive away customers from Netflix.
Back in January, we saw how investing legend Bill Ackman scooped up a $1.1 billion stake in the company after the fourth-quarter earnings plunge. He believed in the company’s long-term potential and how the business had plenty of pricing power to boost margins. However, after the first-quarter results, the investing mogul sold his entire stake at a large loss.
He states that his firm had lost its confidence in the company due to the disappointing subscriber growth. Also, he was skeptical of its plans for ad integration and chasing non-paying users.
Multiple Red Flags
During the tail-end of 2020, co-CEO Reed Hastings had talked about the company wanting a simpler business model without all the hullabaloo which comes with advertising. Moreover, he also commented that it would be “strategically disadvantaged” if it decided to go all-in on its advertising efforts due to the lack of data.
However, the pressure has got to Netflix, and it’s taken a U-turn on its decision. During the first-quarter earnings call, Mr. Hastings said that he was considering the launch of an ad-supported tier. The development suggests that the streaming giant is now in desperation mode and craving new ways to attract customers.
Furthermore, the enterprise also talked about the problem of password sharing and how it was impacting revenues. In the past, it ignored the issue but now aims to address the problem fully. It would be charging its subscribers extra fees for sharing passwords. The sudden change likely alienates a sizeable chunk of subscribers, driving them to other platforms.
Wall Street’s Take
Turning to Wall Street, NFLX stock maintains a Hold consensus rating. Out of 39 total analyst ratings, seven Buys, 29 Holds, and three Sell ratings were assigned over three months.
The average Netflix price target is $302, implying 52.4% upside potential. Analyst price targets range from a low of $235 per share to a high of $405 per share.
The Bottom Line on NFLX Stock
Netflix lost about 40% of its value since posting its first-quarter results. The challenging macroeconomic trends in the market have fostered a risk-off environment for stocks. NFLX stock, which has enjoyed a premium valuation, is one of the stocks suffering the most amid the crisis.
The slightest crack in a bullish thesis will weigh in on investor sentiment for an expensive stock like Netflix. We are seeing a company feeling the heat of its competition, which continues to expand rapidly.
It will take multiple quarters of subscriber growth to restore investor confidence in Netflix and bring it back to its previous levels. However, it is expensive, in my opinion, and likely to lose more value from current levels.
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