Netflix: Investments with Increased Risks
The pandemic of COVID-19 has sped up the growth of Netflix. Many governments imposed quarantine, so populations had to spend much time in front of TVs. This made the number of Netflix (NASDAQ: NFLX) subscribers sky-rocket, reaching over 20 million users.
With time, lockdowns got looser while the number of the streaming service subscribers kept growing – unlike the stock price of Netflix. In July 2020, the shares reached the high and have not risen higher since then. There have been attempts to go farther, but as soon as the price reached 570 USD, the shares started falling.
Why does not the stock price grow alongside the company’s income? Are Netflix shares limited by the range of 500-00 USD?
To answer these questions, we need to analyze the information about the company, track its development before the pandemic, and see what has changed over the last two years.
The number of Netflix paid subscribers beats records
The crucial income source for Netflix is paid subscribers: the more paid subscribers there are, the higher is the company’s revenue. Starting 2015, the number of Netflix subscribers used to by 20-28 million people annually. This lasted until 2020.
In the midst of the pandemic, the company managed to increase the number of users from 167 to 203 million people, i.e. by 36 million users. This was an all-time high.
The number of users grows slower
In 2021, the number of paid subscribers is growing, reaching 209 million over the first half of the year, yet the increase is just 6 million people. If the rate of growth remains like this, at the end of the year the number of new subscribers will reach 12 million people. The company had similar results in 2012 when streaming services were not as popular as they are now.
To put it softly, the growth of the number of subscribers has slowed down. To put it frankly, the slowdown is scary. Disney+, for example, had 116 million of new users over 2 years and 13 million people – over the last quarter. As for Netflix, it only got 1.5 million new subscribers in the second quarter.
All in all, looking at the company over the last 5 year, we can see very well why the shares are not growing. The company is close to its high, and rivalry makes its life harder.
Netflix shares have reached their high
Now let us look at the company’s statistics over a year. In 2020, the growth of Netflix new users renewed the high. This became known after the report for Q4, 220 was published.
The news made the shares grow from 500 USD to 590 USD overnight. It was an all-time high stock price. However, several days later, the price dropped to 515 USD, and a month later, it tested 500 USD.
This is because investors interpreted good statistics as the highest possible high and expected the growth of new users to slow down in the future.
A great quarterly report did not impress investors
On April 20th, 2021, Netflix presented their report for Q1. It showed an income of 7.16 billion USD (an all-time high), while the net profit reached 1.7 billion USD, growing by 140%, compared to the same period of 2020. Regardless of such great results, the stock price dropped by 10% and kept falling for a month. The reason was the information about growth of the number of new users: in Q1, their number reached 207.6 million people, which means growth by 3.9 million users only.
For your information, in the same period of last year the result was 16 million users. In the end, the fears of shareholders proved correct, and the number of new users started growing slower.
Another strong report, another falling
One report is not a trend yet. Hence, when the quotations dropped to 480 USD, investors started buying the shares. Netflix stocks began to grow gradually but started pulling back 2 days before the publication of the next report. There were, indeed, fears that the record of Q4, 2020 would not be beaten, yet investors needed to see the actual report.
June 20th came, the day when the report was due. No one cared how much the company had earned (though the result was better than in the same quarter of last year, reaching 7.34 billion USD) – the main thing was the number of attracted new users.
It was awful: 1.5 million of new users, and for the first time in the last 2 years the company lost 430 thousand subscribers from the USA and Canada. After such news, no one wanted Netflix stocks, and the price dropped by 5%. The decline was not massive only because the shares had been falling before the report, trading 11% below the all-time highs.
Rivalry in the streaming market increases
What has happened? Why did the company use to have the subscriber base increase by at least 10 million people a quarter for 9 years in a row – and now it fails to rise over 5 million subscribers? The answer is the growing rivalry.
Over the last 3 years, the streaming market got replenished by such companies as The Walt Disney Company (NYSE: DIS) with its Disney+, Hulu, and Hotstar services, Apple Inc. (NASDAQ: AAPL) with Apple TV, AT&T Inc. (NYSE: T) with HBO Max, and Amazon.com Inc (NASDAQ: AMZN) with Amazon Prime Video got stronger in the market.
Main rivals of Netflix are Amazon and Disney
The number of Disney+ subscribers reached 116 million users over 2 years, though experts had forecast such results over 4 years only. Experts note that Disney+ can win over Netflix in terms of the number of users thanks to its popularity in India and generally Asia, where it is represented by the Hotstar service.
Amazon is also just too close to Netflix. The number of Amazon Prime Video subscribers reached 150 million people and keeps growing fast. However, Apple remains silent and never voices the information about the number of subscribers, promising to reveal the data when a positive trend shows up.
With the competition being so tough, Netflix has trouble winning new subscribers for itself. And if this number does not grow, investors will turn away, and the stock price will start falling.
Hence, the platform needs to diversify their income by showing ads in movies or providing ads-free subscription but for a higher fee.
Tech analysis of Netflix shares
For a year, Netflix shares have been trading between 465 and 560 USD. The shares will come over the upper border if investors find a new reason to buy stocks or if the number of users starts growing by 10-15 million people a quarter.
The latter condition is hard to imagine. The resistance set at 525 USD has never been overcome, though there have been two attempts.
This means market players have little interest towards Netflix shares. In such circumstances, the quotations might drop to the support level of 465 USD, and after it is broken away, they might head for 400 USD.
The influence of the pandemic on Netflix and the consequences
It seems like Netflix has become a hostage of the pandemic that made its income grow so much. This is quite the opposite to the situation of those who lost everything during the pandemic.
Look at airlines. They are increasing the number of flights gradually, which is a good influence on their income, yet most of them are still working with negative profitability. The pandemic caused a low-base effect for airlines due to borders closed and revenue shrunk, so now the companies have room to grow while they carry more passengers everyday. Borders between countries continue opening, hence, stocks are promising to grow.
On the other hand, Netflix demonstrated record growth during the pandemic and are now struggling to grow at the same rate. As a result, the revenue remains high but things might change. We can be quite sure that after the pandemic, the shares of Netflix are likely to decline.
Netflix management is optimistic
However, things are not as bad as I have written. Netflix management remains optimistic, promising that a decrease in the growth of subscribers’ base is temporary, and in Q3, the number will rise to 4.8 million.
This is not 10 million or 16 million as before but the company need the number of new subscribers to stop falling. Will this come true, anyway?
For the last two quarters, the company’s performance has remained within the forecasts of experts. Q3 might be crucial for Netflix. If the company fails to get 4.8 million of new users, the shares might fall to 400 USD. No matter how optimistic is the management, investors do not share the mood, and the stocks keep declining.
Over the last two years, rivalry has increased in the streaming market, and while Netflix used to be the unarguable leader, its throne is now shaking.
The company has troubles with getting new paid subscribers, while its existing users start leaving for the rivals. Hence, investing in Netflix these days is quite risky.
However, selling in such circumstances is equally dangerous. The company might keep its revenue at the highs, then might find a reason for growth. I advise you all to wait and see.
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