Shares of leading video-streamer Netflix (NFLX) sunk another 7% on Wednesday in what was another ugly day for Wall Street. Indeed, it's hard to believe that the former market darling has lost nearly 75% from its peak, just shy of $701 per share. The lockdown beneficiary has now surrendered its pandemic gains and then some.
At a fresh five-year low, the former FAANG growth stock now trades at a modest 16.6 times trailing earnings. That's not just cheap; it's indicative of a potential value trap. The company has clocked in two straight quarters of weakness. It looks to be the start of a trend. The recent slew of subscription cancellations could be the start of a wave.
Undoubtedly, competition in the SVOD (streaming video on demand) market has been picking up steadily over the course of many years. Add the pandemic pull-forward in demand, inflation's impact, and the recession risk into the equation, and it's been the perfect storm for Netflix.
The real question on investors' minds is whether the selling has been overdone. Turning to Wall Street, it's apparent that analysts view the crash in NFLX stock as overblown.
Does the market have Netflix stock wrong? Or does the recent slip in subscriber numbers mark the beginning of something far worse?
Despite all the negatives and the potential for things to get even worse, I remain bullish on Netflix. The multiple is unprecedently low, and like it or not, Netflix remains a leader in its space, even as rivals look to steal its lunch.
Further, I think there are reasons to give CEO Reed Hastings the benefit of the doubt as he pivots his firm towards the realm of video gaming. With a plan to have around 50 video games under the Netflix umbrella by year-end, the value proposition is bound to improve.
However, I still think Netflix is dipping a toe into the shallow end of the gaming waters when it needs to take a dive into the deep end to regain the confidence of investors amid tumbling subscriber numbers.
Netflix: Video Games Unlikely to Stop Subscriber BleedNetflix is unlikely to take anything away from its video content spending. The video-streaming wars are ongoing, and content will remain king. Though Netflix may suffer from the occasional content drought (we all want the next Squid Game-caliber binge-worthy TV series), a deep roster of video games could help deter consumers from hitting that "cancel subscription" button.
Undoubtedly, Netflix isn't nearly as sticky in a more competitive environment. While high inflation and anticipation of a recession may be to blame for the recent slide in subscribers, I do think that Netflix needs to improve upon the stickiness factor.
In prior pieces, I highlighted that entertainment services heavily favored the bundlers. Thanks to big-tech firms, video streaming is just one component of a broader bundle.
Netflix chief Reed Hastings likely recognizes this, and that's a significant reason why he's taking video games so seriously. Unfortunately, Netflix needs to really open its wallet if its gaming business is to help it reverse the declining trend in subscribers.
The company's line-up of mobile games may be enticing to some. However, the firm needs to make a big splash if the firm's gaming service is to stack up against the likes of Microsoft (MSFT). Microsoft's Xbox Game Pass is essentially the Netflix of video games. It has a wide range of triple-A titles and represents great value for its subscribers.
Netflix is behind in the gaming race, and it's hard to imagine the firm will have the "absolute best" gaming service with Xbox Game Pass out there.
Though mobile games are a decent start, Netflix likely needs to acquire a multi-billion-dollar video-game maker if it's to live up to Hastings' ambitions.
Indeed, the problem is not the technology to stream video games. There is now a wide range of game-streaming platforms out there.
Rather, it's the caliber of content on such platforms. Unless Netflix acquires a gaming behemoth, it's hard to imagine a world where Netflix can catch up in the video-game scene.
For now, I'm skeptical as to whether games can save the stock. The company will need to spend a lot of money, and that's money that could have gone towards the production of a binge-worthy series.
Will Netflix's Freeloader Crackdown Help Stop the Bleeding?Netflix is going to try to make freeloading subscribers pay up. On paper, such efforts should help alleviate recent pressures. However, I don't think such moves will leave a very good taste in the mouths of its millions of freeloading users, some of which may not have the ability to pay for another subscription.
For now, I view the password-sharing crackdown as an effort that will not do anything to sustainably reverse subscriber trends. At the end of the day, Netflix needs to offer its consumers more to get them to stick around instead of looking for short-term fixes.
Wall Street's TakeOn Wall Street, NFLX stock comes in as a Hold. Out of 39 analyst ratings, there are eight Buy recommendations, 28 Hold recommendations, and three Sell recommendations.
The average Netflix price target is $299.93, implying upside potential of 65.4%. Analyst price targets range from a low of $235.00 per share to a high of $405.00 per share.
The Bottom Line on Netflix StockNetflix has become a rather confusing story. The firm appears to be bleeding subscribers and is scrambling to heal the wound. For now, video games are unlikely to reverse cancellations en masse as the economy sinks into recession. Further, freeloader crackdowns and price increases should result in near-term pressure alleviation at best.
Moving ahead, consumer spending could sink. Still, the firm needs to continue investing heavily in video content. If Hastings is serious about video games, Netflix should consider making a big splash in M&A.
There are no easy answers for Netflix. However, the depressed valuation seems to imply that it's curtains for Netflix. In actuality, the firm has levers it can pull to reignite subscriber growth.
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