Netflix Inc. (ticker: NFLX) is a pioneer of streaming video and has the largest streaming platform for TV and movie content in the U.S. Over the years, Netflix has successfully transitioned from relying on third-party content to producing unique, valuable original content. It has also expanded its presence from the U.S. market to international markets. The company’s recent initiatives have included offering an ad-supported subscription tier and cracking down on password sharing.
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Unfortunately, on July 19, the company reported just 3% revenue growth for the second quarter, falling short of Wall Street’s expectations and causing the stock to immediately lose more than 8%. That said, second-quarter subscriptions increased 8% from a year ago, and Netflix stock is still up more than 40% in 2023 heading into the second half of the year. Here are three pros and three cons to buying NFLX stock after its recent run.
Netflix Stock Pros
Large Subscriber Base and Data Collection
As of the second quarter of 2023, Netflix had 238.4 million global streaming paid memberships, having added 5.9 million in the second quarter. In addition to the direct subscription revenue Netflix earns from its subscribers, the company collects data that it can use to optimize its platform.
Morningstar analyst Neil Macker says Netflix has opportunities to further monetize its massive global subscriber base in the future.
“The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as ‘Stranger Things,'” Macker says.
New Ad-Supported Subscription Tier
Netflix launched its Netflix Basic ad-supported subscription tier, priced at $6.99 per month, in November 2022. CEO Reed Hastings adamantly claimed for years that Netflix was against commercials, but now the company is hopeful Netflix Basic will appeal to budget-minded customers and help Netflix maintain subscriber growth.
CFRA says the new ad-supported tier is one of several near-term Netflix revenue growth catalysts.
“The launch of the ad-pay plans creates a new revenue source from advertisers and marketers, where NFLX showed its future content programming in the upfront advertising season,” CFRA analyst Kenneth Leon says.
He says fears over cannibalization of premium subscriptions appear to be unfounded.
“With the new ad-pay plans, NFLX is not seeing cannibalization of its higher priced ad-free subscriber base,” Leon says.
Password Sharing Crackdown
Starting in May 2023, Netflix began allowing only people who live in the same household to share accounts. To retain moochers living in other locations, subscribers must pay an additional $8 per month.
Bank of America analyst Jessica Reif Ehrlich says the password sharing crackdown could have a sizable impact on Netflix’s overall numbers.
“According to Antenna, after alerting subscribers that NFLX would curb password sharing, NFLX had the four single largest days of U.S. user acquisition in the four and a half years Antenna has been tracking the data. If we assume slightly over 60% of password borrowers in the U.S. are converted (across extra member, ad tier and basic), we estimate password sharing could represent a $2 [billion] incremental annualized [revenue] opportunity,” Ehrlich says.
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Netflix Stock Cons
Original Content Is Expensive
As streaming platform competition heats up, original content will be key in differentiating the different streaming subscriptions. Netflix has a strong library of original content, including hit shows such as “Squid Game,” “Stranger Things” and “Wednesday,” among many others. However, that original content comes at a high price. Even after cutting its production costs by about 4.6% compared to 2021, Netflix spent $16.7 billion on content in 2022. The company plans to maintain roughly that level of content spending in the next several years, but investors can expect the cost of content to steadily rise in the long term.
Increasing Competition
Netflix was one of the first major media platforms to go all-in on streaming, and the company and its investors enjoyed a first-mover advantage in streaming for years. That window of limited competition has now slammed shut. The list of paid streaming services is long and continues to grow. Top Netflix competitors include Prime Video from Amazon.com Inc. (AMZN), Max from Warner Bros. Discovery Inc. (WBD), Hulu and Disney+ from The Walt Disney Co. (DIS), and YouTubeTV from Alphabet Inc. (GOOG, GOOGL). In addition to traditional media companies, Netflix is also facing competition for engagement from social media platforms integrating more streaming video functionality, including TikTok, Twitter and Instagram.
Hollywood Writers and Actors Strike
Hollywood actors have officially joined writers to conduct the first joint strike in the industry since 1960. The strike will essentially shut down production in the film and TV industry for the time being, and it may not be all bad for Netflix in the near term. Cost savings on production could boost margins and profitability in the second half of 2023 if the strike drags on. However, it also creates uncertainty about future content slates and puts Netflix at risk of losing customers to podcasters, social media influencers, live sports and other entertainment sources that will continue to roll out fresh content during the strike.
Bottom Line
Netflix may not be the high-flying growth stock it once was, but the company is aggressively adapting to a shifting streaming video climate to create new opportunities for growth in years ahead. As subscriber growth inevitably slows in Netflix’s core North American market, the company will need to rely on its data analytics to determine how to further monetize its existing customers. Netflix will continue to expand and penetrate international markets, but it must do so while minimizing its marketing and content budgets to keep Wall Street happy.
Unfortunately, analysts believe Netflix will have a difficult road to navigate in the next 12 months. The average price target among the 34 analysts covering NFLX stock is just $427.50, suggesting 10.4% downside from its July 19 close of $477.59.
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Should You Buy Netflix (NFLX) Stock? originally appeared on usnews.com
Update 07/20/23: This story was previously published at an earlier date and has been updated with new information.
