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Netflix: Fast recovery unlikely as recession risks loom

  • Netflix’s stock price collapse wiped out $220 billion in market cap
  • As business dynamics shift, investors are questioning the size of the overall addressable streaming market
  • Wall Street analysts see no short-term turnaround in the fortunes of the company
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Global streaming giant Netflix (NASDAQ:) is currently in the midst of a perfect storm. Amid subscriber losses and a risk-averse broad market environment, the pandemic-era darling has become the worst-performing stock this year, shedding nearly 70% of its value. NFLX closed at $181.71 on Thursday.

NFLX weekly

The slump in the world’s largest streaming service was so rapid that it wiped out more than $220 billion in the market cap of California’s Netflix in six months.

But there is little hope of a trend reversal in the near future.

Netflix told investors in April that the staggering growth it’s been experiencing during the pandemic has come to an abrupt halt. Its service lost 200,000 customers in the first quarter of 2022, with the company expecting to lose an additional 2 million subscribers this quarter.

This debacle comes after two years of unprecedented growth, largely due to the stay-at-home situation and the global COVID-related closure of cinemas. Netflix added more than 36 million customers in 2020 and 18.2 million customers in 2021.

But as business dynamics shifted, investors questioned the size of the total addressable streaming market — a number Netflix had previously said could be as high as 800 million. Netflix currently has about 222 million subscribers worldwide as of the end of the first quarter.

Wall Street analysts see no near-term turnaround in the company’s business, especially as the risk of a recession mounts and consumers seek to cut spending amid a four-decade high.

More subscriber losses

According to a Bank of America research note, Netflix stock’s bear market will continue if the widely-anticipated recession hits the economy. The bank says such a scenario could result in further subscriber losses or limit the company’s pricing power.

The note adds:

“Streaming might be sticky in a recession, but platforms will see recurring cancellations and new subscriptions that coincide with scheduled releases of original content, particularly among lower-income users.”

Other analysts seem to share this view. in a (n invest.com Survey of 48 analysts, 24 rate the stock as neutral, 6 recommend it as a sell and another 14 rate it as a buy.

NFLX consensus estimates

Benchmark downgraded Netflix to “sell from hold,” but said in a recent note that it was “skeptical” about a sustained Netflix recovery.

“We have made slight estimate revisions due to the continued strength of the US dollar, including against the yen and European currencies, which are unlikely to be fully reflected in previous Q2 22 forecasts or analyst consensus. We are skeptical of a sustained recovery in Netflix stock, even as bulls tout (or talk) 14.1x forward P/E versus consensus estimates for 2023.

For its part, the streaming giant is scrambling to gain investor confidence. In April, Netflix CEO Mike Hastings announced the company was exploring an ad-supported version of its platform to boost sales and subscriptions. In recent weeks, the company has been exploring a number of partnerships that could help it make those plans a reality.

The company also launched its gaming service late last year. To further expand its gaming offering, Netflix recently acquired video game development studios to produce games associated with its popular shows.

Needham, echoing Netflix in a recent note, said that even after adding an ad-based pricing tier, the streaming giant wouldn’t be a “winner.” His note says:

“Even after adding an ad-driven layer, NFLX is NOT going to be a winner of the streaming wars (in our view) unless it adds sports and news content (to reduce customer acquisition costs), buys an extensive movie and TV library (to retain subscribers longer) and improve bundling capabilities.”

bottom line

Netflix appears to be on a long road to recovery after posting remarkable growth over the past decade. There is significant uncertainty about the success of its future plans as the competitive environment becomes increasingly difficult.

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