From a broader view, it’s hard not to love Netflix (NASDAQ:NFLX). Starting life originally as a DVD subscription service, the company transitioned to the streaming platform. Since then, it has never looked back, enjoying its first-to-market advantage. Later developments, such as the production of original content, made Netflix stock all the more compelling.
But recently, this thesis is under severe threat. Last month, Netflix released its second quarter of 2019 earnings report. To say that it was a disappointment would be a grave understatement. While I’m not going to rehash old news, the key metric to focus on is the subscriber count. In the U.S. market, Netflix lost 100,000 subscribers when analysts expected it to gain 300,000. Unsurprisingly, NFLX stock tanked.
Further, global net ads measured 2.7 million. This tally was substantially below analyst forecasts for five million. No matter how you break it down, Netflix stock lives on subscriber trends. That it fell short so spectacularly hurt sentiment.
But that’s not all. Over the past several months, tech firms and traditional media companies have encroached into Netflix’s arena, disrupting the disruptor. Most notably, Disney (NYSE:DIS) will launch its streaming service Disney+ this coming November. That’s a double whammy for NFLX stock due to a loss of content and the addition of a rival.
Furthermore, Disney will offer a bundled plan which encompasses Disney+, ESPN+, and ad-supported Hulu for $13. That’s the same price as Netflix’s “Standard” Plan.
Beyond the Magic Kingdom, names like Comcast (NASDAQ:CMCSA) and Amazon (NASDAQ:AMZN) are aggressively ramping up their streaming inroads. Plus, NFLX is losing the popular show Friends to AT&T’s (NYSE:T) WarnerMedia.
Is it time to dump Netflix stock?
Recession Worries Hits Netflix Stock Hard
Outside recession fears, I’m inclined to believe that the current fallout in NFLX stock is temporary. And by temporary, I would mean that it’s a discounted buying opportunity.
But in the past weeks, any optimism toward the U.S.-China trade war has evaporated. Additionally, the yield for 2-year Treasuries again moved above the 10-year yield. This inversion of the yield curve potentially signals a recession, yet the Federal Reserve is not acting decisively.
While I don’t want to get too wonky, these signs indicate that a recession is more likely than not. As an investment levered to consumer sentiment, this is a bad omen for Netflix stock.
Now, the typical retort to this bearish assessment is that even in a downturn, people need entertainment. This is one of the reasons why I think AMC Entertainment (NYSE:AMC) makes a viable contrarian case. Certainly, compared to traditional TV subscriptions, Netflix is dirt cheap. And people will give up almost anything before they give up their internet, which is a digitalized society’s lifeblood.
Unfortunately, the robust streaming competition presents a new kink to this logic. In a bullish economy, consumers would probably buy two or even three streaming services. Even at $39, for example, this is much cheaper than traditional TV providers’ post-introductory subscription specials.
But in a recession? That’s when consumers will start belt-tightening. They probably won’t get rid of streaming altogether. However, they may not unnecessarily bundle competing services. Thus, it becomes a race to see who can offer the best content at the best price.
Naturally, this makes stakeholders of Netflix stock nervous, especially after the disastrous Q2 report. Seemingly, subscribers are getting tired of the company’s original content. And streaming is known for fickle viewers.
The Risky Case for NFLX Stock
If push comes to shove, though, I’d gamble that Netflix will rise above the streaming fray. Why? It goes back to original content.
Currently, millennials represent the biggest demographic in the U.S. workforce. That probably won’t change in a recession. Therefore, the people who are most savvy to streaming content are also the ones earning a paycheck.
Ultimately, this benefits Netflix stock because the streaming giant has truly captured the millennial’s attention span. When people watch various shows and programs, they’re mostly doing so through Netflix.
Additionally, NFLX features a wide range of gritty and compelling drama, stuff that millennial subscribers go wild over. And let’s not forget that the company has the Midas touch in terms of producing relevant, award-winning content.
Of course, I’m not completely crazy. This is still a risky proposition given the Q2 results. But it’s not entirely out of the question that Netflix stock can ride out a downturn. Thus, if you want to take a measured gamble, I don’t think it’s a bad idea.
As of this writing, Josh Enomoto is long T and AMC.