As you no doubt know, Netflix (NASDAQ:NFLX) stock had a pretty terrible quarter. After it reported second-quarter earnings two weeks ago — with a loss of domestic subscribers, narrow revenue miss and half the expected new subscribers globally — NFLX stock took a pounding.
Shockingly, $16 billion was lopped from the company’s market capitalization in the bloodbath. Netflix stock hit a six-month low a week ago, closing at $307.30 last Tuesday, but then began three-day climb. That streak came to an end on Monday, when NFLX lost 0.92% on the day.
The question is, will this turn out to be a hiccup in the recovery, or is NFLX stock likely to fall even further in 2019?
Q2 Earnings Impact Still Being Felt
After the awful numbers from Q2, the shock is still rippling throughout the investment community. Raising prices to boost earnings or to bring in more cash to spend on programming clearly is a risky option.
That’s because boosting U.S. subscriptions by $2 monthly cost the company 126,000 subscribers. For perspective, this is the first decrease in U.S. subscribers for Netflix since 2011. Adding to the woes, the five million new international customers Netflix expected turned into 2.7 million.
With analysts expecting domestic subscribers to increase by over 350,000 and NFLX missing its own global adds by 2.3 million, it’s no wonder NFLX stock got hammered. And those misses are still weighing on investors.
Is there any hope of a better performance in the next quarter? In its Q3 guidance, Netflix says it expects U.S. paid subscribers to “return to more typical growth.” In addition, the company projects an additional seven million new subscribers globally. That reassurance helped make the case for last week’s Netflix stock recovery, after the bloodbath immediately following the earnings report.
Big Competition Ahead
On their own, the Netflix Q2 numbers have been troubling to many investors. But what added gasoline to the bloodbath in Netflix stock was the looming competition.
For years, Netflix has been the undisputed king of streaming video. Amazon (NASDAQ:AMZN) is in the game as well, along with a handful of smaller services. But it hasn’t exactly been tough slogging for NFLX. However, the company’s success has not gone unnoticed. Starting this fall, tech, communications and entertainment companies will launch a series of high-profile new video streaming services.
Apple (NASDAQ:AAPL) is spending big on Apple TV+. Walt Disney (NYSE:DIS) will launch its Disney+ video streaming service in November for just $6.99 per month. Furthermore, AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) have new video streaming services coming from their WarnerMedia and NBCUniversal divisions, respectively.
Making the situation even tougher for NFLX stock? It’s not only going to be facing a future where it must compete hard for subscribers, Netflix will go head-to-head against streaming services that will own some of its most popular current content.
The two most-watched shows on Netflix (by a wide margin) are The Office and Friends. They will move to the competition. Add the exodus of Disney content including Marvel and Star Wars movies, and Netflix will face a real challenge hanging onto subscribers, let alone adding more.
Is NFLX Stock Overvalued?
The Q2 earnings report, the pending competition and the loss of critical content all come together into one question: is NFLX stock overvalued?
After all, NFLX has increased in value by over 5000% over the past decade, even after the Q2 earnings bloodbath. In comparison, Microsoft (NASDAQ:MSFT) — which is now a trillion dollar company and firing on all cylinders after years of stumbling — is up 500% in the same decade. And while MSFT trades at a price-earnings ratio near 28%, Netflix has a sky high 130% P/E ratio.
With growth slowing, competition increasing dramatically and Netflix still up 24% on the year, last week’s NFLX stock recovery may turn out to be short lived.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.