Between 2013 and the summer of 2018, Netflix (NASDAQ:NFLX) seemed like one of the closest things to a sure bet for investors. The video-streaming pioneer was adding subscribers at a rapid pace, and there was little in the way of competition. Between 2013 and the summer of 2018, NFLX stock increased in value by roughly 2,900%. That is an astounding return for investors who got in early. Since last July, it’s been a rougher ride for Netflix stock. After peaking at just over $411, NFLX is now trading at $293.61 — a drop of nearly 29%.
Credit Suisse just released a report which contends that investors are “fleeing” NFLX. What’s scaring them away from a stock that used to be virtually bulletproof?
Slowing Subscriber Growth Is Taking a Toll on NFLX Stock
For years, Netflix was a machine when it came to adding new subscribers. The company grew from 24.43 million paying customer worldwide in the first quarter of 2012 to 118.9 million in Q1 of 2018. During that time, NFLX stock grew exponentially in value. But a reality check arrived on July 18, 2018, when NFLX delivered its Q2 earnings. The company missed its own estimates for domestic and international subscriber growth. Investors panicked, and in a matter of hours, NFLX stock had tumbled from over $400 to below $344.
In July 2019, the situation worsened. After rallying for the previous eight months, Netflix stock was hammered again when the company reported its Q2 earnings. Not only did the company miss its subscriber growth forecasts again, but for the first time in eight years, the company’s U.S. subscriber total fell. Netflix said its U.S. subscriber base had fallen by 126,000, while analysts had been expecting the company to add 350,000. That resulted in NFLX stock taking a 10% hit, knocking $17 billion off its market cap.
In addition, the company’s debt grew to over $12 billion, another red flag for investors.
The slowdown of the company’s growth is a tough pill to swallow on its own, but what is spooking investors even more is the floodgates of competition opening up in the video-streaming market.
The announcement of Disney’s (NYSE:DIS) Disney+ streaming service in November added to the pile-on that drove NFLX stock below $235 last December. Disney+ is nothing but bad news for Netflix. It means that NFLX will lose all Marvel, Star Wars and Disney content. Moreover, Disney is undercutting Netflix on pricing. Adding to the danger, Apple (NADAQ:AAPL) is launching its Apple TV+ video streaming service this fall.
Two of the most popular shows on Netflix — Friends and The Office — will soon be lost as well, as other media companies, including AT&T’s (NYSE:T) Warner Media, launch their own video streaming services.
This means that Netflix is not only facing slowing subscriber growth, but it’s contending with tough competition for viewers’ dollars. And, due to the upcoming loss of popular content from its library, the company is under pressure to spend even more on developing its own shows. It spent $12 billion on its own content, oin 2018, and that figure is expected to climb to $15 billion this year. As content disappears, there will be pressure on NFLX to further increase its spending.
Should Investors Avoid Netflix Stock?
After its rough ride starting last summer, NFLX stock has bounced back from the lows it hit in December, and has managed to climb 7.5% in 2019. Despite the doomsayers, many analysts still predict that NFLX stock will climb meaningfully. The majority have a “Strong Buy” rating on NFLX stock, and the median price target on the shares is $420. With Netflix stock currently under $300, if the average outlook is right, there are still real gains to be made. But a lot has changed in the past year, and the competitive landscape NFLX now finds itself in will make it tougher for NFLX to grow than in the past.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.