The investment thesis for Netflix (NFLX -0.32%) has changed dramatically over the past year. With the number of subscribers falling and the development of an advertising platform, Netflix’s business model is changing. As a result, the stock fell nearly 70% from its all-time high in November 2021.
Is there a reason why investors should own Netflix stock, or are the company’s best days behind it?
The bull case: Password sharing and its ad-supported platform are deployed smoothly
In the second quarter, Netflix lost 970,000 subscribers, but it was not as much as the 2 million management projected in the first quarter. Despite the drop in subscribers, Netflix’s revenue rose 8. To see also : Novak Djokovic’s vaccination status remains an obstacle to the US Open.6% year-over-year (year-over-year). This growth is possible because average revenue per member grew in the US, Canada and Latin America.
Growth in the Latin American region is critical because that’s where Netflix is testing account sharing monetization. With over 100 million households sharing passwords compared to 220 million total subscribers worldwide, there is a lot of unrealized revenue that Netflix is trying to capture. The odds of converting all accounts are low, but many may pay a small fee to keep access to Netflix’s content library.
Additionally, Netflix has been working on its ad-supported platform, which could help it win back some of its lost customers. A standard Netflix plan (two screens and HD streaming) costs $15.49 per month, making it one of the most expensive streaming platforms. A lower-priced ad-level platform is likely to be priced around what other streaming services charge, but Netflix needs to be careful not to cannibalize some of its existing full-price customers.
It won’t be easy, but if Netflix can fix its subpar platform and not lose too many customers to monetize password sharing, it will see an impressive sales boost. In turn, profits will rise, further exaggerating Netflix’s relatively low valuation of 19.6 times earnings.
Management believes things are already looking up for the business as they forecast 1 million net subscriber additions for the third quarter. If Netflix can live up to that expectation and show progress on its two big initiatives, Netflix stock looks set for a bullish run.
The bear case: Netflix’s initiatives backfire
Netflix is no longer alone as a streaming service. Consumers have a lot of options, and there’s nothing stopping them from canceling a month only to restart their subscription when their favorite show premieres a new season. Read also : Why the global inflation problem is bigger than US politics. Unfortunately, this rotation could spell disaster for Netflix’s ad-supported platform.
First, full price users can downgrade and deal with the occasional commercial. This choice would allow them to use the money they save to subscribe to another service. They would still be paying customers, but not generating nearly as much revenue. Second, if the practice of rotation continues, consumers would be tempted by the lower price level. Neither of these scenarios is good for Netflix and could lead to a drop in its cash flow.
Cash flow is vital for every business, and with just $13 million in free cash flow this quarter, that metric is relatively low for a mature business. With free cash flow profitability faltering, Netflix is in a precarious position as the economy looks poised to enter recession territory. Also, its balance sheet isn’t the cleanest, with $8.5 billion in net debt.
Netflix could ease its spending on content to increase that number, but then it would cut the life of its streaming service short.
Management may have given upbeat subscriber numbers for the third quarter, but its financial projections were less impressive. With revenue forecast to rise 5% year-over-year and operating profit to decline 29% year-over-year, investors aren’t enthusiastic about owning the stock. That sentiment is reflected in its 19.6x revenue multiple, but if Netflix struggles to implement its new initiatives, that number could drop further.
Netflix’s bear vs. bull case can be summed up in how well the company is doing with its new ad-supported platform. This release could make or break Netflix, which makes me want to stay away from the stock. If it works, there’s solid upside for Netflix stock. But if it doesn’t, Netflix could have a major problem on its hands.
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Netflix. The Motley Fool has a disclosure policy.
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Netflix. The Motley Fool has a disclosure policy.
