Netflix Can’t Chill: Too Many Worthy Competitors Are Looming


For a stock that gets as much attention as Netflix (NASDAQ:NFLX), one “minor” detail seems to be going overlooked these days. Down more than 23% from its 52-week high, Netflix stock, believe it or not, is currently mired in a bear market.

Netflix Stock is Setting Up as Short Play Amid Buy-the-Dip Temptation

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So what’s ailing once-beloved Netflix stock? Fortunately, the question is easy to answer, but where things get murky is how well the company is going to answer the query.

Much of the recent lethargy in Netflix stock is attributable to rising competition in the streaming space. While it felt like Netflix had the streaming universe mostly to itself for awhile (it did), this landscape isn’t one conducive to quasi-monopolies as Amazon (NASDAQ:AMZN) has in online retail or as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has in Internet search.

Every day, companies in all industries contend with rivals. Often, the results of the tussles boil down to quality of the competitors and how deep their pockets are. That’s some of the bear thesis with Netflix stock. Streaming rivals include Amazon, Apple (NASDAQ:AAPL) and Walt Disney (NYSE:DIS). All three are or will soon make significant streaming strides and they have the resources to pinch Netflix.

Competition could beget more lost subscribers, long the bane of Netflix stock. Explaining why Netflix stock has struggled since its second-quarter earnings report just over a month boils down to the 126,000 lost domestic subscribers when Wall Street was expecting the addition of 352,000. The 2.8 million international additions were overshadowed due to that number missing estimates by two million.

There’s Hope for NFLX Stock … Sort Of

Yes, there’s a bull case for Netflix stock, but investors willing to exercise some restraint may be able to get pricing than they see today for a couple of reasons. First, some of the aforementioned competition, such as Disney+, is coming soon, and as companies update on that front, Netflix stock could be dinged. Second, the chart on Netflix is not attractive from the long side.

While investors may be lacking enthusiasm for NFLX stock at the moment, some data points indicate subscribers may be renewing affinity for the streaming provider’s wares.

“It’s still early in the quarter, but data through July looks solid (rebound from 2Q),” said SunTrust Robinson Humphrey analyst Matthew Thornton in a recent note. “Google searches (on keyword “Netflix”) and mobile app downloads for the month also show nice upticks vs 2Q19 and back toward or above the 1Q19 high-water-mark.”

New content could be a catalyst for Netflix stock, but there are costs associated with that and NFLX has a history of losing money. Plus, the company’s cancellation track record confirms it’s more likely to make a new dud than another “Orange Is the New Black.”

Bottom Line on Netflix: Fierce Competition

In its early days, Netflix had pricing power, which enabled it to raise subscription fees without much churn. But with an onslaught of new competitors in the streaming world, pricing power is diminishing.

“Larger firms like Disney and WarnerMedia are launching their own SVOD platforms to compete against Netflix,” said Morningstar in a recent note. “We think this usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn.”

The research firm notes that while admirable, international expansion efforts by Netflix carry no competitive advantage, because its global and local rivals can adjust their own content budgets to go head-to-head with Netflix.

Thanks to companies like Roku (NASDAQ:ROKU) that are driving pay TV prices lower through over-the-top delivery, Netflix may not be able to apply much more upside pressure to its $13 a month base subscription fee. In lieu of significant subscriber growth, lost pricing power is a headwind for NFLX stock that must be acknowledged.

Todd Shriber does not own any of the aforementioned securities.

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