Even after a 35% drop in its stock price, it might not be a good time to buy NFLX.
Earnings season has begun, and Netflix has gotten off to a bad start in 2022. One day after releasing its first-quarter results, NFLX stock dropped 35%.
Let's understand what happened and discuss whether now is the time to invest in the video streaming leader.
What Happened to Netflix?
The company recorded a drop in subscriber numbers for the first time in more than 10 years. During the quarter, more than 200,000 customers canceled their subscriptions.
Netflix had expected to add 2.5 million new subscribers this quarter, while the market had expected as many as 2.7 million.
The loss led many analysts to revise their projections for NFLX downward. As investors bailed, the stock fell 25% on April 19 and 35% on the 20th.
Currently, the stock is trading at prices last seen in 2018. Could this be a signal to buy? We don't think so.
Is the Streaming Industry in Danger?
The streaming market is growing fast and should continue to do so in the coming years. Its growth prospects are particularly good in developing countries, where internet access is spreading.
However, because the market is so fragmented, competition can hurt companies. We see this with Netflix, which by raising prices is subject to losing subscribers to several other rivals, such as Disney+ and Amazon Prime Video.
What to Expect in the Coming Months
Netflix has already said that it is studying cheaper subscription models for its platform and is courting the possibility of adding a low-priced tier that would include ads. Although the company has previously been proudly ad-free, its rivals HBOMax and Hulu have already adopted this strategy successfully.
Will Netflix's ad revenue help to compensate for a potential decrease in the average subscription price? Even if the company uses a lower membership tier to grow its user base again, it's possible that its revenue won't grow as it has in the past.
In addition, Netflix has also announced that it plans to crack down on password sharing. In the U.S. and Canada, Netflix estimates that 30% of households are using a shared password to access its content.
Even if the company can solve these problems and sees some growth in the short term, we can't see Netflix fixing its growth troubles in the long term.
Our View: It's Not Time to Buy
Even with a 35% drop in just one day, it's hard to make the case that NFLX is currently a cheap stock. Netflix, which is considered a growth company, has stopped growing like it used to. It has even lost subscribers.
Until the company is able to find other ways to monetize its existing subscribers, investors should rethink whether the company is a good buy.