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Netflix: is it too soon to write this stock off completely?


Netflix (NASDAQ: NFLX) shares have plunged 67% year-to-date as the streaming giant re-evaluates its business model in the face of rising competition. But it’s too soon to write off the company completely, even though more than 200 streaming services are now available globally – according to some estimates – battling it out to be crowned the winner, much is undecided.

For a long period, Netflix operated in a relative monopolistic way, becoming the main, if not only, streaming service consumers could turn to. Then came Amazon Prime and a myriad of others from Apple TV+ to Disney+, offering instant entertainment and original content.

It should not come as a surprise that Netflix, which launched in 1997 and started offering streaming services in 2007, would eventually come under pressure from competitors. And that has been reflected in its latest quarterly earnings.

Netflix: slowing revenue growth

The company announced, on 19 April, that revenue growth had slowed, up only 9.8% to $7.9m compared with 24.2% at the same time last year, and 16% in the fourth quarter of 2021. It also lost 200,000 subscribers over the period – though part of that was driven by the company’s suspension of services in Russia.

The problem is, this is expected to continue. Growth in the next quarter is forecast at 9.7%, with new subscriptions expected to fall by 2 million. Netflix said it is aiming to maintain an operating margin of around 20%.

Netflix’s share price fell more than 35% on 20 April, which was the biggest one day drop for the stock since 2014.

For many, Netflix’s results signal bigger problems.

Bill Ackman hits the off button

Bill Ackman, famed hedge fund manager, sold his entire stake in the company at a loss of more than $400m following the trading update. It had only bought the stake in January.

In a letter to investors he said: “While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.

“One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis. That is why we did so here.”

Others have been less quick to sell out. Baillie Gifford‘s US fund managers said they were surprised by the update and are mulling whether to stay invested.

“Streaming services are a dime a dozen these days, and standing out is an expensive undertaking,” commented Laura Hoy, equity analyst at Hargreaves Lansdown. “Unlike rivals Disney and now Amazon, which owns a trove of content through its MGM acquisition, Netflix doesn’t have much of a back catalogue of content comparatively speaking. Netflix practically invented binge-watching, but the entertainment it’s serving up is getting more and more costly as it’s forced to build its own slate of hit-shows.”

Better monetization of services

But for Netflix’s management, macro factors, competition and account sharing have contributed to the current picture, which can improve as the group better monetizes its service longer term.

The plan now is to “reaccelerate our viewing and revenue growth by continuing to improve all aspects of Netflix – in particular the quality of our programming and recommendations, which is what our members value most,” according to a letter to shareholders.

On content, the streaming service is going to be focusing on quality rather than quantity. It will also crack down on password sharing as it estimates that more than 100 million households are using another person’s account.

Hoy said gaming is also another potential revenue driver “with two acquisitions bolstering the group’s ability to serve an entirely new market”.

She added: “Protecting profits is high on management’s priorities with an aim to keep margins over 19%, but as revenue growth stagnates, it’s difficult to see how the group will continue to grow its user base without succumbing to eyewatering content costs.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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