The past year has been tough for Netflix (NASDAQ:NFLX). Its shares have fallen the most in the group of five top technology companies that includes Amazon.com (NASDAQ:AMZN) and Apple Inc (NASDAQ:AAPL).
That sharp pullback has made some investors wonder if this a buying opportunity, or a long-term bearish signal for the video-streaming giant, after its powerful rally over the past decade that saw it mostly outperforming other tech stocks.
The answer to this fundamental question isn’t easy, given the fast changing dynamics of the video-streaming market. But one difference that’s making Netflix bulls nervous is that this time, the slump is holding and a buy-on-the-dip strategy isn’t working.
For example, Netflix is still deep in a bearish spell five weeks after its latest earnings report caused a big plunge in its stock. Its shares are down more than 19% since then, unlike previous dips which immediately attracted bulls to take advantage and bid the stock higher. The shares closed yesterday at $294.98, up 1.2% on the day, after four straight days of losses.
So, what’s changed to keep investors on the sidelines? In our view, the current down cycle reflects both the short-term challenges the company is facing and investors’ fears about the intensifying competition.
Let’s start with what’s happening with Netflix’s earnings. The biggest setback for the company came in the last quarter when it missed expectations on both domestic and international markets. Netflix reported last month that the number of its paid streaming subscribers in the U.S. declined, for the first time, when compared to the first-quarter. Adding to that bombshell, Netflix also said it added a net 2.8 million new paid streaming customers globally, while Wall Street expected the number to be closer to 5 million.
In the normal scheme of things, these shortfalls probably wouldn’t have attracted that much negativity because Q2 is usually a weak quarter for Netflix and, after all, the giant has consistently produced strong growth and beaten analysts’ expectations in the past.
Subscriber Growth Slowing
But what hit the stock most this time was that consumers aren’t responding favorably to Netflix’s price hikes. The company mostly lost subscribers in those regions where it increased monthly prices for its streaming packages.
For many, that showed a limit to the pricing power that Netflix could use to bridge the gap between its revenues and spending. It also meant the path to profitability for the company may not be as smooth as many analysts had priced in, especially at a time when it’s bleeding cash and borrowing heavily to produce new content.
The shock on Q2 earnings also forced investors to take the upcoming competition more seriously. The Walt Disney Company (NYSE:DIS) announced this month that it’s offering a new bundle of streaming services at a surprisingly low $12.99 a month, with a package that includes family programming, live sports and a deep library of television shows. Disney is matching Netflix’s standard plan and marketing the service at $3 below its premium version.
Apple, another deep-pocketed contender in the streaming business, plans to roll out the Apple TV+ movie and TV subscription service by November, potentially priced as low as $9.99 a month, according to Bloomberg news. AT&T Inc (NYSE:T) and Comcast Corp's (NASDAQ:CMCSA) NBCUniversal also plan to offer their streaming versions — all aiming to end Netflix's monopoly.
These risks definitely make Netflix a risky bet in the short-run, but that doesn’t mean that the company has completely lost its fan base. In fact, there is a divergence of views between the analysts' community and what the company’s current stock price reflects.
“As Netflix’s content investments, distribution partnerships and marketing spend drive subscriber growth significantly above consensus expectations and the company approaches an inflection point in cash profitability, we continue to believe shares of NFLX will significantly outperform,” analysts at Goldman Sachs wrote in a recent note, assigning the 12-month price target of $420 a share.
Bottom Line
Netflix stock’s journey upward has largely been unhindered in the past decade. But with the increasing competition, rising costs, and saturation in the domestic market, it seems increasingly difficult for the streaming giant to repeat that performance. A revival in subscription growth in the second-half would be key for the market to reverse this impression.