Netflix Is Unlikely to Recover Lost Ground This Year
It's no secret that the streaming business has been struggling as of late. With people returning to in-person entertainment, many streaming companies are seeing a steep drop in subscriber numbers. This has led to layoffs and cutbacks, and many streaming platforms are now reconsidering their strategies. While it's still too early to say where the streaming business is headed, it's not doing as well as it once was.
Netflix (NASDAQ:NFLX) shares are in decline, and it's because the streaming service has lost subscribers for two quarters now. It had an alarming million-subscriber loss between April and July, but it was smaller than expected, with some good news mixed amongst all this negativity.
Netflix has come up with an interesting way of releasing its hit series. It is now copying the cable model of releasing episodes on a piecemeal basis rather than all at once like before, so we'll have fewer opportunities for binge-watching. Netflix has tested this new delivery method with select shows over the past year. In addition, Netflix is looking to get rid of password sharing and has increased its subscription fees.
However, CFRA analyst Kenneth Leon is not convinced that this strategy will yield the hoped-for results and predicts more pain is around the corner for the streaming giant. According to Leon, earnings per share and the bottom line will come in lower for the second half of the year than they did in the first for Netflix.
Leon downgrading Netflix from "hold" to a "sell" rating is a major development, especially when the streamer is losing subscribers and Disney (NYSE:DIS) is making life tough for Netflix.
The stock has plummeted by over 50% since the start of the year, and investors are unlikely to return for the foreseeable future.
The new ad-supported tier is being marked as a potential revenue driver
Netflix has seen better days. The Walt Disney Company's streaming offering, Disney+, now has 221 million streaming customers across multiple platforms. In contrast, Netflix has lost subscribers for two quarters, which is a big step back for the company. Rivals are closing in, and the company finds itself in uncharted waters.
To combat this situation, Netflix is looking into several ideas. The biggest thing the company is doing is introducing a new ad-supported tier that could cost between $7 and $9 per month. Analysts predict the move will lead to a massive cash inflow, which will help dispel the negative sentiment surrounding the stock.
According to an Ampere Analysis report, Netflix could gain an impressive $1.7 billion from U.S-based advertising and around $5.5 billion in global ad revenue by the year 2027.
The company's global haul could rise by about $8.5 billion, translating to more money being pumped into content creation or distribution efforts worldwide.
Netflix is looking to diversify
Netflix has long been at the forefront of popular entertainment, with a wide variety of content that appeals to viewers worldwide. Now, the company is looking to branch out into another area of popular culture: gaming. Over the last year, Netflix purchased several gaming companies, including Boss Fight Entertainment, Night School Studio and Next Games.
With this move, Netflix is now looking to become a major player in the gaming industry. By producing its games, Netflix will be able to reach an even wider audience and continue to grow its business. However, it remains to be seen whether Netflix can get ahead in this new venture. Only time will tell if Netflix can provide an enjoyable and successful experience in the gaming world.
Subscribers could fall further
Netflix is facing many challenges that could cause it to continue to lose subscribers in the coming year. One major issue is inflation.
Netflix has been successful in part because it has kept prices low for a long period. Now, Netflix is trying to maximize revenues through its existing consumer base by hiking prices. This strategy could go either way for the company, as it faces increasing competition from Disney and other streaming video providers. They are growing in popularity with consumers while hurting Netflix's subscriber numbers.
However, as costs rise, Netflix will either have to reduce the quality of its service or raise prices, leading to a decline in subscribers. As Netflix's revenue is slowing and its competition from new streaming services is rising, the company finds itself in a tough spot, but the situation can get even worse.
Finally, the current economic climate could reduce consumer spending, which would also impact Netflix's bottom line. As a result, Netflix is likely to lose subscribers in the coming year.
Takeaway
Netflix has been on a bit of a roller coaster as of late. It lost subscribers for the first time in a decade in the first two quarters of the year, and the stock price is tumbling as a result.
Its primary source of revenue is from subscriptions, and that revenue is highly dependent on subscriber growth. With Netflix losing subscribers in its most important market, it is unlikely it will be able to grow its revenues at the rates investors have come to expect.
The situation is unlikely to change in the second half of the year, which means the stock price could fall further.
This article first appeared on GuruFocus.