Netflix‘s (NFLX 2.69%) The drop from fastest growing stocks to defeated value stocks has been truly unbelievable. Less than a year ago, Netflix’s stock price nearly eclipsed $700 a share. Now, it costs around $230.
A multitude of issues caused this drop, some of them outside of Netflix’s control. However, the key question now is: Can Netflix go back to growth mode?
Let’s find out what it takes for Netflix to reach that state again.
Facing growing headwinds
There were several factors involved in Netflix’s downfall, but they included market exuberance, customer attrition, and intense competition.
In November 2021 (the peak of market hype), Netflix traded for more than 60x earnings, but only grew revenue in the upper teens in the previous two quarters. That’s a steep price to pay for a company growing at that rate that had just enjoyed the most significant business boost it’s likely to experience: COVID-19-induced lockdowns. There wasn’t much room left for Netflix to grow, especially in its core North American market, and that’s when the bull case started to unravel.
In the first quarter of 2022, Netflix lost subscribers for the first time in a decade. First, many customers likely felt they no longer needed home entertainment as much as the in-person meetings that were making a comeback. Second, Netflix faces stiff competition.
As more companies launch their streaming services, Netflix is losing much of its licensed content and must come up with its own. Netflix relies on blockbuster series to retain its customers, but this comes at a steep price: Netflix’s standard plan ($15.49 per month) is the most expensive streaming service on the market. That high cost allows him to finance many originals, but the public has more options than ever.
Overall, these factors have taken a heavy toll on Netflix, with the stock down more than 65% from its all-time high.
Netflix’s road to recovery
Netflix has multiple paths to grow its customer base and revenue to regain its status as a growth stock.
First, you’re looking to add an ad-supported level. The management noted that it would not force ads on any of its existing tiers, but rather create new options that can attract viewers from all over the world. This lower price offer can potentially win back old customers who cut off service due to price while attracting new ones. Only time will tell how successful this subscription will be, but investors should watch this effort closely following its projected launch in early 2023.
Another growth lever Netflix is trying to push is its campaign against password sharing. Netflix has known for years that millions of households were doing this, and it didn’t care. Instead, he left these people alone to broaden his reach with consumers. But now, the time has come to do away with that luxury and monetize the more than 100 million households that share passwords.
Netflix will not make people who share passwords buy their own account. Instead, additional houses can be added for a relatively low monthly cost. This change, which has already been tested in some international markets, will not make access as expensive as an individual account, but it will provide additional revenue.
Finally, the company will continue to produce content in its quest for massive success. Netflix wants to create a platform that makes consumers feel left out if they don’t have one, especially as the service has lost content to rival media companies’ own streaming services.
A murky picture for investors
So will this work and give Netflix the boost it needs? Unfortunately, the outlook is not promising.
Most of these growth levers are one-time changes. Netflix could see strong near-term revenue growth as consumers embrace the new ad-supported tier or add additional homes to their accounts. But after that, there just aren’t that many customers left to capture. In the long term, Netflix will once again find itself in a low-growth environment, but with no obvious options other than raising prices.
If the consumer feels that Netflix’s premium streaming service isn’t worth it, then it’s going to be a repeat of 2022 all over again.
I don’t think Netflix will regain its growth stock status, but I’m not betting against it either. CEO Reed Hastings has gotten Netflix out of trouble multiple times and could do so again. However, there is too much risk for me. There are much better growth stocks available to investors, and your time is better spent looking at these great companies.