Shares of video streaming pioneer Netflix (NFLX) have effectively been knocked out of the FAANG basket after their horrific implosion of about 75% peak-to-valley. The correction in the name has to do with a streaming market that isn’t nearly as bountiful as it used to be, with new rivals invading and companies willing to blow significant sums of money to gain subscribers.
While some may think the “streaming wars” are coming to an end, given the diminishing economic gains to be had with each newcomer, I think only just as entertainment bundles (think video, music, and games) are becoming more common.
The former tech-savvy company now seems to be valued as just another media company. While CEO Reed Hastings is a man with innovation in his veins, it can be difficult to regain previous multiples. Indeed, the Netflix stock crash isn’t just about macro factors that weighed on the rest of the market.
Despite market uncertainties and stronger rivals, I remain neutral on Netflix stock as it desperately seeks a way to gain ground in streaming while making a dent in new markets like video gaming. I’m not so sure if gaming is the way to make Netflix sticky again. Anyway, I think it is unwise to bet against Hastings as he is looking forward to new frontiers in interactive entertainment.
What’s Wrong With Netflix Stocks?
Competition is increasing, as many old-fashioned media companies are eager to switch from linear television to streaming. After the widely followed merger, Warner Bros. Discovery (WBD) is now on track to take streaming to another level with the merging of the HBO Max and Discovery+ services. Competition creates a churn problem for Netflix. With every media company announcing strategic, streaming-focused, long-term spending plans, the outlook for Netflix is getting a little grim.
In simple terms, Netflix seems to be stuck on that mouse wheel that releases content, while its margins seem to be challenged by competitors. Undoubtedly, Warner Bros. Discovery still has a lot of revenue from linear television. Programming from Discovery is still largely cable-oriented.
In any case, Warner Bros. Discovery a firm of intriguing brands (think DC Comics and reality shows from Discovery) that could have the resources to close the gap with its much bigger streaming rivals.
For now, Warner Bros. Discovery is weighed down by more than $55 billion in debt. This could curtail its streaming ambitions and lead to cuts in original content creation in the short term. Over the next 10 years and beyond, Warner Bros. Discovery could develop into a new competitor for streaming.
Despite increasing competitive pressures, Netflix still has deep pockets, algorithms and beloved brands by its side. Since indebted rivals such as Warner Bros. Discovery, cutting shows (like Batgirl), will be able to entice Netflix viewers with its high budget and pipeline of releases. Sandman is one of the bigger budget series that could bring many former Netflix users back.
Once such users return, Netflix will have to lock them up because the next content drought is inevitable. Unfortunately, Netflix’s gaming push hasn’t had much of an effect, with only ~1% of users bothering to try some of Netflix’s newly launched mobile gaming offerings.
Netflix’s gaming push isn’t paying off
Netflix seems to go for quantity over quality when it comes to gaming. While Netflix seems to be spinning, it may want to send more of its gaming budget to a select few titles with what it takes to draw crowds.
The mobile gaming scene may be growing fast, but Netflix doesn’t yet have a game library that matches Apple’s (AAPL) Arcade service. Despite its rough (and conservative) start to the video game scene, I don’t expect games to be scrapped as a failed series.
There’s not much to lose by betting big on mobile gaming. If Netflix uses its original brands (think Stranger Things or Sandman), it may have better luck enticing users to try its range of mobile games.
Unfortunately, the inability to play Netflix games through the Netflix app seems to hurt the gaming push. According to Apple’s policy, Netflix requires users to download the games separately from the App Store.
For now, Netflix’s gaming business seems like a giant question mark, and I’m not too sure if it will help the company retain subscribers and move forward. Mobile gaming appears to be a market dominated by just a handful of “whales,” and unless Netflix is willing to take a big shot at a big-budget title, the gaming business may not launch.
There’s just way too much competition in mobile games.
Netflix tries to hit the “SPOT” with podcast listeners
Netflix’s partnership with music streamer Spotify at the end of last year (PLACE) was intriguing. Spotify’s inclusion of a “Netflix Hub” gives Netflix a glimpse of what it would be like to be in the audio world.
Spotify’s podcast push was a move to differentiate itself from the increased competition in music streaming. So far, the move has paid off. Still, Spotify faces many of the same problems as Netflix amid increasing competition in entertainment services.
Undoubtedly, a merger between Netflix and Spotify makes a lot of sense. The media market has seen a lot of consolidation. Any merger could take some power away from Netflix in the long run.
Because Warner Bros. Discovery is one of the newest media titans to watch, I think Netflix would be wise to expand into new territories to end the churn.
Is Netflix Stock a Buy, Sell or Hold?
As for Wall Street, NFLX stocks are coming in as a Hold. Of the 32 analyst ratings, seven are Buys, 19 Holds and six Sells.
Netflix’s average price target is $229.30, which equates to a 6.7% downside potential. Analysts’ price targets range from a low of $157.00 per share to a high of $365.00 per share.
Conclusion: Netflix is in a challenging place
Netflix remains in a challenging spot as media rivals look to gain more ground. Now that bundling is becoming the new norm for entertainment subscriptions, you have to look to Netflix to open its wallet to evolve. For now, the 21.4x lagging earnings multiple seems a bit rich.
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