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Has Netflix Found a Bottom?

Posted on Wednesday, October 16th, 2019 by Chris Markoch

Netflix (NASDAQ:NFLX) is getting ready to announce its third-quarter earnings report. Analysts will be watching closely to see if Netflix is able to turn around its declining subscriber growth. Netflix is predicting an increase in total paid subscribers of 7 million. That would be a 14.75% YoY increase. Meeting those numbers would go a long way towards helping Netflix sustain its stock price at current levels.

It’s been a tough year for Netflix (NASDAQ:NFLX). One of the darling FAANG stocks, the streaming giant’s stock price is being battered by threats on multiple fronts. Despite concerns about a declining subscriber base, NFLX managed to put together solid numbers throughout 2018 and the stock price continued to climb.

Even after the tech wreck of December 2018, Netflix bounced off a low of around $246 and rose to a high of approximately $385 in early May.

Netflix has had a cruel summer

But it didn’t start off that way. NFLX stock enjoyed a brief rally up until early July. This followed the release of a new season of their hit show Stranger Things. The rally did not last.

As part of their quarterly earnings report, the company announced it had missed its new subscriber estimate. Except it didn’t just miss; it missed by nearly 50%. Netflix had projected it would add approximately 5 million new customers. It added 2.7 million.

In fairness, this doesn’t say the company lost 2.3 million subscribers. It just means they gained less than they were forecasting. It didn’t matter to investors and the stock began to drop. Traders were looking for any opportunity to sell Netflix stock. And when they got it, they didn’t waste time. NFLX stock has dropped over 33% since July, hitting a low of just above $254 on September 24.

But in recent days, the stock looks to have found its footing. The stock has bounced off a technical low at right around $250 and the stock appears to be finding support at around the $270 mark.

Don’t get too excited about Netflix

Even if the streaming giant is done falling, it’s unlikely that the stock will reach its former highs anytime soon. There are too many variables in play. Netflix always had a tenuous moat around it. The company had supremacy in the streaming arena for two reasons. First, the major media companies didn’t foresee the trend towards cutting the cord. Second, because of that, Netflix was able to license their content.  For all the buzz about original series like Breaking Bad, House of Cards, The Crown, etc., the company knew that it needed a catalog of shows that viewers could binge-watch.

But now the media companies are introducing their own streaming services. Competitors such as Apple (NASDAQ:AAPL) and Disney (NYSE:DIS) are entering the streaming wars. But increased competition is not the only issue for Netflix. Another problem is that they are losing some of their most popular content. Two of the most popular series on Netflix remain The Office and Friends. However, neither of these titles will be available to Netflix subscribers after 2020. Friends will stream exclusively on HBO Max starting in the spring of 2020 and The Office will be moving over to NBCUniversal’s service when the contract with Netflix expires at the end of 2020.

Netflix is banking on original content

This is putting even more pressure on Netflix to create its own original content. That costs money. And NFLX is giving investors a double whammy of burning through cash while taking on debt. In 2018, the company reported a $3 billion loss in non-GAAP free cash flow. And with the company becoming increasingly dependent on original content, it does not appear this trend will reverse anytime soon. All of this means that a company that already is not showing a profit will not be showing a profit anytime soon.

Increased competition means Netflix will have to find its own niche

First, as consumers begin to weigh a variety of digital content providers, they are realizing that each provider is carving out a niche for themselves. For example, Disney will have family-oriented programming and the exclusive rights to Disney content formerly found on, among others, Netflix. That’s a problem for Netflix. On the one hand, they have an established audience. Customers have grown so accustomed to Netflix they may be reluctant to change their providers. On the other hand, with Apple announcing that its new Apple TV+ subscription will cost just $4.99, Netflix will face a pricing problem. Although Apple TV+ has a relatively small market, it is another option which is exactly what consumers don’t need, particularly as they are beginning to do the math of subscribing to multiple streaming services and realizing that to do so would mostly negate the cost savings they were receiving by cutting the cord.

 

 

Companies Mentioned in This Article

CompanyCurrent
Price
Price
Change
Dividend
Yield
P/E
Ratio
Consensus
Rating
Consensus
Price Target
Netflix (NFLX)$289.62+2.3%N/A108.07Buy$371.61
Apple (AAPL)$262.64-0.7%1.17%22.09Buy$242.33
Walt Disney (DIS)$147.15-1.1%1.20%25.50Buy$152.16

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