Netflix, Inc. (NASDAQ:NFLX) is a household name that has revolutionized how people consume entertainment by enabling on-demand streaming anytime and anywhere. Its membership base has been expanding for well over two decades and has firmly secured it as one of the most popular streaming platforms globally.
While the company was founded in 1997 and launched a streaming service in 2007, it really came to the forefront during the 2020-21 era, spurring increasing demand for at-home entertainment.
Netflix benefitted from increasing subscribers as well as a rising engagement rate as existing subscribers increased viewing hours and experienced accelerated growth in international markets.
Even at a time when uncertainties loomed large about where the world was headed, Netflix was able to generate substantial returns. Investors were equally impressed with its financial and subscriber growth but what does the future hold now for the streaming giant?
Is Netflix Retaining Subscribers?
In 2020, when lockdowns started, more than 36 million subscribers were added by the company to reach over 200 million subscribers globally, a substantial increase.
Unsurprisingly, a slowdown in the pace of growth followed in the subsequent years as restrictions loosened and attention veered away from the streaming platform.
After competitors flooded the market with alternative streaming platforms and traditional entertainment resumed operations, Netflix also came under increasing competitive pressures.
In 2021 and 2022, Netflix’s subscriber growth was modest compared to the massive growth enjoyed in 2020. While the platform attracted subscribers, growth was not as remarkable.
Then in the first quarter of 2022 a shocking turnaround took place when Netflix saw its first subscriber decline since 2011. The company reported a loss of 200,000 subscribers.
The future seemed bleaker when management reported almost one million subscriber losses in the second quarter, the first such occurrence in two decades. This was a result of cancellations, price hikes, and competition from other streaming services.
How Did Netflix Turnaround The Sinking Ship?
New viewers are the oxygen that keeps Netflix growing and, to win over new business, management invested capital into more content production and reach.
The company embarked on several strategies, such as a crackdown on password-sharing, launching the ad-supported tier, and a low-priced alternative to reignite its wheel.
The initiatives seemed to yield fruit when Netflix subscribers jumped by 30 million over the year, the second-largest annual growth since it was launched.
The momentum seems to be continuing in 2024 with the addition of 9.3 million subscribers in Q1, which resulted in nearly 270 million total memberships and 16% growth year-over-year.
However, the company expects the current quarter additions to be slower due to a seasonal dip. Revenues grew to $9.37 billion for the quarter from $8.16 billion in the year-ago quarter.
On the other hand, it’s worth mentioning that the company is not planning to disclose membership numbers starting 2025, as well as average revenue per member. This move coming from a streaming company is a big deal and triggered investors to sell, which resulted in the share price plummeting. The lack of transparency is, no doubt, troubling.
How Well Is Netflix Doing Amid the Streaming Wars?
With new entrants in the streaming sector and existing competitors stepping up their game with higher quality content and user experiences, the sector has gradually become saturated over the last couple of years. Competition has forced Netflix to struggle for subscriber growth as well as market share retention.
One of Netflix’s top competitors is Disney+, which was launched in late 2019. It rapidly gained traction with popular brands, such as Disney, Pixar, Marvel, Star Wars, and National Geographic. The loyal fanbase of these content factories propelled Disney+ higher on the popularity scale.
Besides the presence of Disney+, Amazon Prime Video, which has a large reservoir of seemingly endless content, HBO Max, which has the exclusive right to popular shows, and Apple TV+, with ever-high-quality content, are collectively formidable competitors to Netflix.
To withstand the streaming competition, Netflix is working on broadening its content, especially in the Original productions category given their high appeal.
Despite facing stiff competition, Netflix’s worldwide brand recognition and popularity are commendable. Over the next few years, the company’s efforts to innovate will be crucial to sustaining growth.
While some may think that Netflix has already emerged victorious in the battle of streaming, the company must further evolve to sustain subscriber growth.
What Does The Future Hold For Netflix Stock?
New tactics to stop password sharing and introduce tiered plans bode well near-term for Netflix stock but the future longer term may be bleaker as competition stiffens.
While the recent announcement by management that it will stop disclosing vital subscriber data, Investors must be wary of what the post-2025 outlook will be for the streaming giant.
The stock has delivered very strong returns of more than 70% over the past year but valuation is starting to appear elevated.
The stock trades at 6.2x forward sales, a level which certainly assumes a higher sales potential than its industry peers, with the median at 1.17x.
Moreover, it is trading at 30.5x expected earnings for the current year, while its peers trade at less than half of this multiple. Compared with its five-year average of 52.6x, this valuation is still a discount.
On the other hand, analysts see the stock soaring higher as they issued a price target of $633.72 per share. To reach this price, Netflix shares need to move 14% higher from the current level.
Netflix is expected to continue to grow in spite of competition or economic uncertainties, and considering the dominant position it has achieved, a dollar cost averaged purchase likely makes most sense.
The overall consensus ratings suggest buying it. There are 21 buy recommendations, 16 holds, and 1 sell.
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