Netflix (NASDAQ:NFLX) executives were undoubtedly already in damage-control mode, even before the streaming giant revealed last quarter’s fiscal numbers and subscriber headcount. The first loss of paying U.S. subscribers since 2011 was sure to take a toll on NFLX stock. The question was, how much of a toll?
The answer was 10%, at least initially. That’s how much Netflix stock sank the day after the proverbial bomb was dropped, though shares fell a total of 15% post-earnings before starting the recovery effort currently underway. Investors have largely taken the “buy on the dip” advice to heart, seemingly convinced CEO Reed Hastings has a firm grip on where it went wrong.
And perhaps he does. Perhaps he doesn’t.
Regardless, understanding what went wrong and being able to do something about it aren’t necessarily the same thing.
The Lesser Reason NFLX Stock Crashed
It would be short-sighted to think one-dimensionally about last quarter’s net loss of 130,000 U.S. subscribers. Conversely, it would be naive to pretend the price increases that went into effect in May weren’t a key catalyst for the setback.
The underpinnings are more complicated than just a price increase; Netflix has survived price increases in the past.
So what has changed? Hastings’ intuition was that “Q2’s content slate drove less growth in paid net adds than we anticipated.” In other words, the company didn’t offer enough of the video content that North American customers wanted even though it was offering more content.
He’s probably not wrong. Subscribers have quietly noticed a shrinking amount of desirable content for a while, though they have been lenient given the monthly cost of less than a nice meal. The price increase put in place during the second quarter was the proverbial last straw, but it had been looming for years.
Hastings also made it clear he doesn’t believe streaming competition was a factor, “since there wasn’t a material change in the competitive landscape.”
That assessment was on-target in a sense, but alarmingly incomplete.
The Bigger Reason(s) NFLX Stock Crashed
If he meant no new service was launched during the second quarter that could siphon off U.S. customers (and perhaps distract some potential overseas customers), Hastings is on-target.
If he was speaking to the breadth and depth of competitors’ content libraries, he’s wrong.
Though arguably still lacking in terms of overall quality, the Amazon (NASDAQ:AMZN) Prime library consists of 12,000 films, dwarfing the count boasted by Netflix as well as Hulu, currently co-owned by Walt Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA).
That’s the same Hulu, by the way, which added an impressive 8 million subscribers last year to bring its headcount to 25 million in an arena allegedly dominated by Netflix. Though not all of them were or are Netflix defectors, certainly some of them had to be.
In the meantime, although Disney+ has yet to launch, Disney is slowly but surely removing its content from Netflix’s platform in anticipation of making its planned November launch as potent as possible. Some consumers may be willing to go without any streaming service while they wait for Disney+, or the ones AT&T (NYSE:T) says it has planned for the near future.
TV viewership-ratings company Nielsen Holdings (NYSE:NLSN) has identified yet another reason U.S. customers are giving up on Netflix’s service altogether — a renewed preference for traditional cable television programming.
It’s a premise that flies directly into the face of the cord-cutting movement, though the idea jibes with other, similar data. Overwhelmed by the sheer number of choices of video to watch, much of it unfamiliar, viewers often opt to simply let cable companies make the matter easy. Nielsen says that 33% of would-be watchers are willing to browse through their streaming options when they don’t want to watch something in particular, while 58% of them simply tune into their favorite cable channel.
The sum total of all of these modest challenges combine to create a significant one, first in the United States, but eventually the same is likely to take shape overseas.
Looking Ahead for Netflix Stock
Don’t misread the message. Netflix isn’t doomed, and NFLX stock isn’t in what’s sometimes called the “race to zero.” If nothing else, a savvy company could and likely would scoop up a beleaguered Netflix just to own the brand name.
Don’t think for a minute last quarter was just a blip. This is the beginning of a day of reckoning of sorts, when Netflix must accept the fact it’s now being challenged well before years of excessive spending secured its place as the only meaningful player in the streaming video space. And, unlike any of the outfits it is competing with, Netflix only has one way to effectively monetize its content.
That’s certainly a reason to think twice before stepping into a new position in Netflix stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.