Can Netflix Regain Its Growth Stock Status?

Can Netflix Regain Its Growth Stock Status?

The streaming pioneer has a long road ahead before it’s growing rapidly again.

Netflix ‘s ( NFLX 2.69%) fall from top growth stock to beaten-down value stock has been truly incredible. Less than a year ago, Netflix’s stock price nearly eclipsed $700 per share. Now, it sits at just around $230.

A multitude of issues caused this drop, some of them out of Netflix’s control. However, the key question now is: Can Netflix return to growth mode?

Let’s find out what it will take for Netflix to achieve that status again. Facing off against growing headwinds

There were several factors involved in Netflix’s tumble, but they included market exuberance, customer attrition, and intense competition.

In Nov. 2021 (the peak of the market hype), Netflix traded for more than 60 times earnings, yet it only grew revenue in the upper teens in the prior two quarters. That’s an expensive price for a company growing at that pace and one that had just enjoyed the most significant business boost it will likely ever experience — the COVID-19-induced lockdowns. There wasn’t a lot of room left for Netflix to grow, especially in its core North American market, and that’s when the bull case began falling apart.

In the first quarter of 2022, Netflix lost subscribers for the first time in a decade. First, many customers likely felt they no longer needed as much home entertainment as in-person gatherings were returning. Second, Netflix is facing stiff competition.

As more companies launch their streaming services, Netflix is losing a lot of its licensed content and must generate its own. Netflix relies on big-hit series to retain its customers, but this comes at a steep price — Netflix’s standard plan ($15.49 per month) is the most expensive streaming service on the market. That high cost allows it to fund a lot of originals, but audiences have more options than ever.

All in all, these factors have taken a heavy toll on Netflix with the stock down more than 65% from its all-time high.

So what’s next? Netflix’s path to recovery

Netflix has multiple paths to growing its customer base and revenue to regain its status as a growth stock.

First, it’s looking at adding an ad-supported tier. Management noted it wouldn’t be forcing ads onto any of its existing tiers, instead creating a new options that can appeal to viewers around the globe. This lower-price offering can potentially recapture old customers who cut the service due to price while attracting new ones as well. Only time will tell how successful this subscription will be, but investors should watch this effort closely following its projected launch in early 2023.

Another growth lever Netflix is trying to pull is its crackdown on password sharing. Netflix has known for years that millions of households were doing this, and it didn’t care. Instead, it left these people alone to widen its reach with consumers. But now, the time has come to remove that luxury and monetize the more than 100 million households that share passwords.

Netflix isn’t going to make people who share passwords purchase their own account. Instead, additional homes can be added for a relatively low monthly cost. This change, which has already been tested in some international markets, won’t make access cost as much as an individual account, but it will provide additional revenue.

Finally, the company will continue producing content in its search for massive hits. Netflix wants to create a platform that makes consumers feel left out if they don’t have it, especially as the service has lost content to rival media companies’ own streaming services. A murky picture for investors

So, will this work and give Netflix the kick-start it needs? Unfortunately, the outlook isn’t promising.

Most of these growth levers are one-time switches. Netflix could see strong, near-term revenue growth as consumers adopt the new ad-supported tier or add additional households to their accounts. But after that, there just aren’t as many customers left to capture. Long term, Netflix will once again find itself in a low-growth environment but without any obvious options besides raising prices.

If the consumer then feels Netflix’s premium streaming service isn’t worth it, then it will be a repeat of 2022 all over again.

I don’t believe Netflix will regain its growth stock status, but I’m also not betting against it. CEO Reed Hastings has led Netflix out of trouble multiple times, and he could do it again. However, there is just too much risk for me. There are much better growth stocks available to investors, and their time is better […]

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