Woe to thy fellow Netflix bagholders
Netflix had a bad year.
They fell off FAANG (which was then changed to MATANA) and the stock continues to show weakness as it currently trades at approx. 50% off its all-time highs. As the stock sold off, it found support at 2017 levels of $170.
At those levels, investors decided to buy in once again as the stock was trading at a mere quarter of its share price as compared to a year before.
Since then, the stock has managed to recover where it currently trades at $320 at the time of writing. While the reasons for the sell-off were plentiful, investors often ask if the fundamentals of the stock changed during the process.
Enter; Wednesday
The newly launched series ‘Wednesday’ has officially overtaken fan favorite ‘Stranger Things’ in their first week of launch by clocking almost 341.2 million hours of global viewing times compared to Stranger Things’ (S4) 335 million views.
This makes the series Netflix’s biggest-ever English language series!
While viral content may not necessarily equate to a spike in membership subscriptions nor make a significant impact on a company’s fundamentals, they do at the very least help Netflix to stay ahead of its competitors when it comes to creating content that’s both engaging and relevant to their audience.
Investors speculate if this renewed ‘refreshing’ content launch could mark the beginning of a new era for Netflix. Accompanying this are some rather bullish remarks in the market where Chairman Barry Diller from American Conglomerate, IAC, recently mentioned that Netflix will “will never be displaced as leader in streaming”.
While the stock has more than doubled since its 52-week low, Netflix still operates in a segment that many deem to be in decline after Covid caused the streaming industry to accelerate rapidly from 2020 to 2022.
Let’s look at some of the challenges and opportunities for Netflix in the days ahead!
Do successful blockbusters send Netflix’s share price flying?
Here’s something to start us off on a fun note.
The list below includes some of the best series that Netflix has released over time. While Wednesday is not quite on this list yet, I’ll be including it in as well as it is likely to make it into the hall of fame.
- Wednesday — Newly released
- Squid Game (season 1), a Korean survival thriller — 1.65 billion hours.
- Stranger Things (season 4), a retro sci-fi series — 1.35 billion hours.
- Dahmer, a true-crime serial killer series — 856.2 million hours.
- Money Heist (part 5), a Spanish-language thriller — 792.2 million hours.
- Bridgerton (season 2), a period romance — 656.3 million hours.
- Bridgerton (season 1) — 625.5 million hours.
- Money Heist (part 4) — 619 million hours.
- Stranger Things (season 3), a retro sci-fi series — 582.1 million hours.
From the chart above, it is indeed hard to find any clear patterns.
However at the very least, I can conclude that based on sheer logic, that the release of such blockbuster series surely do not have any ‘adverse’ effects on the share price of Netflix. Do you think investors anticipate such releases and consider them as part of their bullish/bearish thesis? Let me know your thoughts on the comments below.
Netflix’s Fundamentals
In my opinion, the fundamentals of Netflix held on well as Revenue along with net income actually stabilized during this period. Perhaps what spooked investors the most was likely how they saw these figures as a tipping point hence the sell-off.
In terms of PE, we are also seeing this metric fall into “value’ territory to match that of the index as Netflix’s PE fell to 20 when it was trading at its 52-week low.
Are there opportunities ahead?
Let’s face it. Covid-19 accelerated the growth of all streaming businesses. However, businesses in this segment are starting to see growth marginalize as users begin to seek out other more experiential forms of entertainment.
If we look at the current Netflix relative to the streaming industry say 2 years ago, we are looking at very different levels of competition.
Netflix’s Challenges
1) Streaming demand has lost steam
The overarching theme for the streaming industry is such that demand is no longer as hot as it used to be amongst consumers possibly because inflation is causing consumers to be more selective with non-essential spending.
Furthermore, traveling and physical experiences are all the rage now. Will consumers ever reach a point where they feel that it’s a norm to pay for Netflix hence they just continue paying for it despite not utilizing it as much?
2) Strong competitors are emerging
The competition today includes the likes of Disney+ and Prime video, both of which only recently started to wrestle for market share with the likes of Star Wars and Lord of the Rings.
Netflix has been around for 15 years whereas Disney+ was launched just 3 years ago. Subscriber count-wise, we are looking at 223 million vs 164 million. It is clear that Disney+ has reached that massive growth spike much faster than Netflix.
Remember how during the initial phase of Covid where the only ‘thing’ to watch was Netflix? Who even uses the phrase “Netflix and chill” anymore?
While we can argue that Netflix has clearly ‘warmed up’ consumers, one thing is for sure is that they need more content like Wednesday to continue reasserting their dominance in this field.
3) Ad-supported plan may turn off subscribers
Netflix is launching an alternative membership tier where members would pay about 30% less per month.
Although this move is being greeted with much optimism from both management as well as investors, it is difficult to tell how this will give Netflix the upperhand, given that all other competitors are considering the same pivot as well.
While this would no doubt bring Netflix at least an additional “$3 a month in ad revenue from each of those users”, this may not go far if they continue to lose subscribers to other competitors.
Netflix…NO Chill
From a risk-to-reward perspective, there just seems to be too much risk given that this industry has already peaked since early this year. Therefore, I think that the headwinds faced by Netflix are apparent.
This puts the stock in a scenario where it may not reach its all-time high again. That said, as Netflix enters ‘value’ territory, this may warrant the attention of an entirely different group of investors who may adopt a longer time horizon with regard to their investment.