Shares of streaming entertainment kingpin Netflix (NFLX) have been plunging considerably lower of late, now down around 50% from their peak levels at ~$700 per share. With shares sagging around the $350 per-share mark, questions linger as to whether the former entertainment behemoth is worth a second look on the dip.
Though Netflix is still a leader that'll be tough to top in streaming, the competitive forces have grown so rapidly. With the pandemic tailwind now gone, Netflix may face its toughest competitive fight since its days clashing with Blockbuster and its mail-in DVDs.
Netflix rose out on top at that time as a pioneer in the Streaming Video-on-Demand (SVoD) space. As people become spread across a wide range of video subscription services, though, the staying power of Netflix will be propelled to the forefront.
Indeed, the average consumer likely has video subscriptions that go far beyond Netflix. Arguably, the SVoD space is becoming less convenient, with so many options out there. Further, big tech titans have pretty much thrown in their video services alongside a wide range of other services, most notably music and photo storage. For now, I am neutral on the stock.
Netflix's Price Increases Could Weigh on GrowthAlthough Netflix has demonstrated considerable stickiness and pricing power up until now, it remains to be seen what happens to the entertainment behemoth once a recession happens and consumers are forced to tighten.
Video streaming services are quite discretionary in nature. With Netflix hiking prices amid rampant inflation, it's unclear how consumers will react this time around, especially given the price of necessities, rent, and food has been off-the-charts.
Though we're not in a recession yet, consumers certainly feel the pinch. The inverted yield curve, which could point to a recession in 2023 or 2024, also does not bode well for discretionary firms.
If anything, Netflix's recent price hikes could work against it, given rivals will be fighting for a share of your average consumer's streaming budget, which could fall if we were to head into a Fed-induced economic downturn.
Indeed, questions linger as to whether Netflix's last quarter of slowed subscriber growth is just the start of a sustained trend lower. Though Netflix has a ton of great content, I think the company would have been better off absorbing the blow of inflation. The last thing investors want to see is a further deterioration in subscriber growth in the face of great economic uncertainty.
Netflix's Rivals are Getting StrongerTo offset slowing growth trends, Netflix needs to improve the value proposition for its users, as its big-tech bundling peers like Apple (AAPL) have been. Arguably, the Apple One bundle is hard to stack up against, with gaming, video, cloud storage, fitness, and news services at a reduced price.
Apple's streaming service, Apple TV+, may come up short versus the likes of a behemoth like Netflix. Still, Apple TV+ has come a long way since its days as a freebie that many Apple users passed up on. Apple's Oscar-award-winning CODA itself is gaining considerable attention, as too is sci-fi thriller Severance, a high-rated series that looks to "rhyme" with that of Netflix's Black Mirror.
Indeed, the Ben Stiller-directed series Severance and other intriguing additions (think Friday Night Baseball) to the Apple TV+ platform are starting to tilt the odds in favor of the platform over the likes of a Netflix, especially for some of the more price-conscious consumers out there who may be reluctant to accept the fact that prices are headed higher.
Netflix Needs to Go Beyond Video to Keep its Growth StrongWhat can Netflix do to improve the value of its own service? Obviously, a higher quantity and quality of video content will be needed to keep growth alive in a more competitive landscape.
However, the firm may need to go beyond just video. It's not a mystery that Netflix has video-game ambitions, but it's way behind in the game (forgive the pun, please), with only a few mobile offerings aimed at casual gamers.
I'd argue that Netflix should be looking to take a page out of Microsoft's (MSFT) playbook by making a big acquisition to bolster its footing in gaming. Otherwise, it could be hard for consumers to stand by as rivals drive down the price of video services.
It's not just gaming where Netflix can thrive; live sports is another arena (again, forgive the pun) in which the firm can better compete against the likes of an Apple TV+ or even a sports-focused service like DAZN.
With Apple in the running to win the rights to stream NFL Sunday Ticket, it seems as though Netflix may need to hustle to differentiate itself in the discretionary entertainment scene, which is growing to encompass more than just movies and series.
Wall Street's TakeTurning to Wall Street, NFLX stock comes in as a Moderate Buy. Out of 35analyst ratings, there are 18 Buy recommendations, 15 Hold recommendations, and two Sell recommendations.
The average Netflix price forecast is $508.57, implying upside potential of 45.5%. Analyst price targets range from a low of $342.00 per share to a high of $700.00 per share.
The Bottom Line on Netflix StockNetflix is down, but it's not out. Still, with an increased risk of a recession, recent price hikes and a crackdown on account-sharing may do the firm more harm than good amid its growth slowdown.
As the company explores new growth verticals (sports or gaming), the stock can have the means to bounce higher again. Until then, the road could prove rather bumpy for the former market darling facing competitive pressure from all sides.
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