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Netflix ads: NFLX stock price will struggle despite new tier if subscribers continue to flee

14:31, 23 September 2022

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  • NFLX
    Netflix
    236.96 USD
    -3.9 -1.630%

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Netflix continues to lose subscribers. Photo - Shutter Stock

The pioneer of online streaming services continues to face competition pressures as subscribers flee to other streaming platforms.

In 2022, for the first time ever, Netflix’s (NFLX) global subscriber numbers began to decline. During the first half of the year, the platform lost 1.17 million subscribers in total. While rivals such as Disney + (DIS) continued to increase their numbers.

The streaming services sector has become increasingly saturated in recent years making it harder to retain consumer loyalty. The current high inflationary environment has only worsened the issue.

Netflix (NFLX) price chart 

Netflix has outlined its strategy to survive this lull. It plans to continue to focus on long-term growth and keep its focus on original content. Its recent plans to introduce advertisements at the start of videos is also likely to help improve profit margins. Markets are still unsure about the prospects for the stock. Share value remains 60% lower year to date, which is more than 40% lower than broader stock markets losses, such as the S&P 500 (US500) and Nasdaq 100 (US100).

 

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Fall from grace

After a successful period during lockdown, achieving record profits, Netflix (NFLX) began to lose its subscriber numbers. Markets lost confidence in the stock and value began to decline, falling to lows last seen in 2017.

The higher profitability seen in the sector during the lockdown era has attracted a large amount of competition. The sector is much more saturated than it used to be. Netflix’s biggest rival Disney (DIS) only launched its streaming service in 2019, and gained traction as recently as 2020 and is already seeing growth numbers bigger than Netflix.

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Russ Mould, investment director at AJ Bell said in a note: “The combination of increased competition and consumers’ cutting back on discretionary spending as higher bills and fuel and energy costs hit home is partly to blame, alongside tighter control of household password sharing.”

He adds that the fall in the share price also has another reason behind it. “The share price fall also owes a lot to the very lofty valuation afforded the stock during the pandemic. The desire to pay pretty much anything for growth stocks has dissipated, in the face of two warnings on subscriber growth and higher interest rates (usually a negative for long-term growth stocks, as higher discount rates lower the long-term value of future cash flows and thus the theoretical value of the equity).”

Disney (DIS) price chart 

Stock Outlook

Netflix still forecasts a 10% growth in its sales, although the resulting profits could be dampened by adverse foreign exchange movements. It also expects a growth in profit margins for the full year of between 19% to 20%.

Regarding revenue forecasts for the third quarter of 2022 Mould says: “The current consensus is $8.1bn, up from $7.5bn in Q3 2021.”. While he expects earnings per share to lower from $3.19 to $2.72 year on year.

Mould says: “If those figures are met, then Netflix now trades on 17 times earnings for 2021 and barely 15.6 times for 2023, both discount ratings relative to the S&P 500 (US500). This is a massive contrast to the huge premium ratings attributed to the stock during lockdowns.”

He concludes “It will be interesting to see if any contrarians start to argue there may be some value here now – especially if Netflix can win fresh subscribers or boost revenues through advertising (or at least carefully constructed packages with or without ads). However, some may still decide the balance sheet makes the stock a risky proposition.”

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