Like several other COVID-19 beneficiaries, Netflix (NASDAQ: NFLX) endured a whiplash effect this year that has many stakeholders wishing they could turn back the clock near the beginning of the global health crisis. Benefiting from a “hostage audience” dynamic, NFLX stock soared during the worst of the pandemic. With COVID-19 fears fading, the narrative no longer is openly hospitable. Nevertheless, long-term demographic trends suggest that Netflix may be trading at a discount. I am bullish on NFLX.
To recap, the initial onset of the COVID-19 crisis understandably panicked public officials. Due to lockdowns, streaming services such as Netflix thrived, invariably bolstering NFLX stock.
However, when fears of COVID-19 fell by the wayside, especially as government bodies loosened pandemic-related restrictions, consumers suffering from a massive case of cabin fever rushed out the door. Under a phenomenon known colloquially as revenge travel, people who previously deferred their vacations because of the crisis eagerly sought to actualize them. As well, consumers naturally grew tired of digitalized entertainment, instead desiring the real deal.
Not surprisingly, these broader headwinds impacted Netflix’s financials. As TipRanks reporter Swati Goyal mentioned, the company’s second-quarter earnings report demonstrated that “there is still much work to do.”
“Revenue rose 8.6% year-over-year to $7.97 billion but still fell short of the internal projection of $8.05 billion and missed Wall Street’s expectation of $8.04 billion.” As well, “Netflix shed 970,000 subscribers in the second quarter. While that was more than [the] 200,000 subscribers it lost in Q1, it turned out to be significantly smaller than the two million subscribers the company had feared it would lose.”
Not quite the performance that the streaming firm wanted to print in Q2, it does provide some evidence that NFLX stock is far from being a failing investment. With enough patience, bold contrarians can possibly eke out a substantial return, primarily because of demographic trends.
Interestingly, on TipRanks, NFLX has a 6 out of 10 Smart Score rating. This indicates that the stock is slightly more than likely to outperform the market, going forward.
Favorable Long-Term Demographics May Bolster NFLX StockAlthough the broader public focus concentrated on the COVID-19 crisis and the subsequent economic recovery effort, the U.S. Census Bureau also brought up a rather alarming development. Declining birth rates and international migration resulted in historically small population gains – just 0.1% in 2021. It represented the slowest rate of growth since the founding of the nation.
Should this trend continue to play out, it’s possible that content geared toward an adult audience would be fundamentally more attractive than content focused on children. While this framework would extend decades, theoretically, current demographic trajectories suggest that Netflix is better positioned for future growth than rival Disney (NYSE: DIS). Unless the population pyramid starts to tilt decisively younger for the U.S., Netflix stands to absorb a larger addressable market.
In other words – discounting unusual Benjamin-Button-type of cases, people not only age as the years go by, but their tastes become refined. Subsequently, Netflix’s grittier programs, such as Narcos, may attract the 18 years and up crowd. Further, from 18 years until the grave, such adult-focused content will consistently attract a wide demographic. On the flip side, Disney cartoons, for instance, only feature a narrow period of attraction.
Once kids reach a certain age and/or maturity level, they’ll probably not consume family-oriented content except for exercising rare bouts of nostalgia.
The Benefit of Lower ExpectationsAnother factor that may help NFLX stock rise above the muck of the post-pandemic new normal is lower expectations. Though rival Disney features an enviable content empire and far more memorable franchises, it must also deal with greater expectations. Even the Magic Kingdom doesn’t always get it right.
That’s not to say that Disney is a bad investment because it features some bullish angles in its own right. However, the company – because it owns fan-favorite franchises – must strive to deliver bigger and better. Such a trajectory may not be sustainable indefinitely.
For instance, Screen Rant mentioned that while The Book of Boba Fett on Disney’s streaming platform enjoyed pre-release hype, the end product “proved something of a letdown.” Frankly, it was bound to happen. Companies can’t expect to keep knocking it out of the park every single time with their products.
On the other hand, while Netflix also courts pressure, it’s not quite to the same magnitude. With the freedom to create franchises rather than to build off almost religiously sacrosanct brands, fewer consequences exist for getting off on the wrong note. Therefore, NFLX stock may organically benefit from not being under the content pressure cooker.
Is Netflix Stock Expected to Rise?Turning to Wall Street, NFLX stock has a Hold consensus rating based on nine Buys, 18 Holds, and five Sell ratings. The average NFLX price target is $242.00, implying 8% upside potential.
Conclusion: Worth Keeping on the RadarUnderstandably, NFLX stock represents a high-risk, high-reward venture. Those that can’t tolerate the possibility of severe market downgrades may want to stay on the sidelines. At the same time, the broader framework suggests that Netflix isn’t nearly as terrible as some analysts suggest it is. For the contrarian, it’s well worth keeping on the radar.
Shares of streaming kingpin Netflix (NASDAQ: NFLX) have quietly rallied 45% off their lows, as investors began to shrug off subscriber loss concerns that helped drag the stock down more than 75% from peak to trough. Undoubtedly, investors have soured on the streaming industry in a big way. With a growing number of strengthening rivals funneling ample investment into streaming tech and exclusive content, it's difficult to imagine a scenario where Netflix stock gets its sky-high 2021 multiple back.
Indeed, it's been a tough valuation reset for Netflix shareholders. The FAANG stock used to be one of the most compelling of the batch. Now, investors and analysts are looking to other acronyms to describe this market's tech leaders, and they don't include Netflix, which has some work to do if it's to command a more premier price tag.
It's not just Netflix that's imploded. The entire streaming industry has been under considerable pressure this year ahead of a recession year. The industry has matured, and potential growth to be had from the space is starting to look quite modest.
Some pundits may wonder if spending vast sums of cash to attract subscribers is worthwhile. Add streaming's churn problem (subscribers may cancel after viewing their favorite content) and ad-based tiers into the equation, and valuing any streaming company has become a lot more complicated.
Indeed, many investors may be inclined to err on the side of caution regarding streaming newcomers. Paramount Global (NASDAQ: PARA) and Warner Bros. Discovery (NYSE: WBD) sport price-to-book (P/B) multiples well below one. As streaming rivals continue investing in their DTC platforms, Netflix needs to show that it's worth a substantial premium to its up-and-coming smaller brothers in the media space.
As Netflix continues doubling down on quality content that sticks while expanding its circle of competence to include video games, I do think Netflix stock can claw back subscribers (and a higher multiple) through and after a recession.
I remain bullish on Netflix stock at $237 and change per share.
Ad-Based Tier and Increased Competition Complicate NFLX's ValuationNetflix and the streaming industry are in for significant changes over the coming 18 months. With inflation and a recession taking a toll on consumer budgets, demand for cheaper, ad-based tiers is bound to rise. Netflix is getting into ad-based streaming with hopes that such a move will not cannibalize its higher-cost tiers. While cost may be one factor fueling recent Netflix subscriber cancellations, a lack of content relative to peers may be a bigger concern.
Now, Netflix still has one of the deepest and strongest content libraries in the space. That said, the number of options has grown, and that's likely helped fuel increased churn. The Apple (NASDAQ: AAPL) TV+ streaming platform essentially came from out of nowhere over the past year, making quite a bit of noise at this year's Emmy Awards.
Undoubtedly, Apple TV+ was a streamer you could have counted out of the game when it launched a few years ago. Now, the low-cost option gives consumers more reason to cut the Netflix cord. As Warner Bros. Discovery consolidates its streaming service, Netflix's dominance will be put to the test.
In any case, Netflix still has the means to expand its lead, even as its rivals' content libraries swell in size. Netflix has the money to spend on must-see shows such as Sandman, Squid Game, and The Crown. As long as Netflix has such quality content, viewers will come, and an ad-based tier, I believe, could help Netflix gain an edge over lower-cost rival services.
It's hard to tell how the ad-based tier will shift the competitive landscape and Netflix's fundamentals. Regardless, the company is taking steps to turn the tables back in its favor. If it can reverse subscriber bleeds going into a recession with the help of a lower-cost tier, I think the current 21.7x trailing price-to-earnings (P/E) multiple may be too low.
Next Phase of Streaming: The Bundling Wars?The bundling of entertainment services seems to be the hot trend for content creators of late. Apple's streaming platform is bundled alongside a broad range of other subscriptions. The savings for consumers make such bundles tough to unsubscribe from. Netflix has recognized that entertainment bundling may be the future of streaming, and it's ready to compete with a video-gaming service that many users and investors may be too quick to discount.
It's been a slow start for Netflix's gaming push. However, it has begun to make some noise among hardcore mobile gamers, with titles like Stranger Things: 1984. Despite the growing roster of mobile games available to Netflix subscribers, many have yet to try them.
Perhaps Netflix's ad-based tier can shed more light on the intriguing games and experiences.
What is the Prediction for NFLX Stock?Turning to Wall Street, NFLX stock comes in as a Hold. Out of 32 analyst ratings, there are nine Buys, 18 Holds, and five Sells.
The average Netflix price target is $242.00, implying upside potential of 2.1%. Analyst price targets range from a low of $157.00 per share to a high of $365.00 per share.
Conclusion: Don't Count Out NFLX YetNetflix stock has been in the doghouse for quite a while. With massive change up ahead, the magnitude of uncertainty is nothing short of profound. Still, investors that have faith in Reed Hastings could have a lot to gain by giving the streamer the benefit of the doubt.