Streaming entertainment giant Netflix (NASDAQ:NFLX) offers plenty of family-friendly programming, but the recent price action in Netflix stock is best left for mature audiences only. Following the recent third-quarter earnings report, Netflix stock rallied, but has since given back all of those gains.
The shares are basically flat, but that’s deceiving because following the aforementioned earnings update, Netflix stock rallied to just over $300. On Oct. 22, the shares slipped below $267.
As has been widely noted, perhaps the biggest issue confounding Netflix stock right here right now isn’t subscriber growth (it was admirable in the third quarter), its speculation about what increased competition in the streaming arena will mean for the company that was once the undisputed heavyweight champion in this space.
It’s not just Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) Netflix has to tussle with in streaming entertainment. It’s Disney (NYSE:DIS), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and others. In fact, Dow components Disney and Verizon (NYSE:VZ) said on Oct. 22 that Verizon subscribers will get a free trial of the Disney+ streaming service.
That’s gravy for both companies because many, if not a majority, of those free trial users will stick around after the trial’s up and pay the monthly tab for Disney+.
What NFLX Can Do
With Netflix stock down about 17% over the past year, it’s not unreasonable to say the shares have more than adequately priced in increased competition. After all, Amazon and Hulu, among others, have been entrenched competitors for some time, and Apple seemingly talked about streaming content offerings for an eternity before revealing Apple+, which goes live next month.
Where Netflix can start in terms of regaining investor confidence doesn’t even pertain directly to the success of its original content, but how it manages its finance. A theme I’ve been beating the drum on this year is investors’ waning tolerance for companies that are losing money and burning cash. Netflix isn’t the most egregious offender in either category, but some shoring up in both areas could positively affect the stock.
In the third quarter, Netflix “burned $551 million during the quarter, down from a loss of $859 million a year ago,” said Morningstar in a note out last week. “However, management maintained its 2019 free cash flow loss target of $3.5 billion, implying a cash burn of $1.9 billion in the fourth quarter which would be a single-quarter record. While continuing to insist the cash burn will decrease in 2020, management admitted that Netflix will move ‘slowly’ toward positive free cash flow.”
In terms of saving cash, an easy place to start is not overpaying for the rights to popular TV series. Streaming providers, including Netflix, have shelled out big dollars for the rights to “Friends” and “Seinfeld,” among others. However, researchers at Harvard suggest capturing the rights to big-name series doesn’t always drive subscriber growth for streaming companies.
“Yet our full analysis yields no evidence that a streaming service adding content from a TV channel is a notable driver of cord-cutting behavior,” according to the Harvard study. “In other words, if the TV shows from someone’s favorite channel became available to stream on Netflix, for example, that alone didn’t make them more likely to end their pay TV subscription. We also we found evidence that households already prone to cord-cut (young and low-income people) became even more prone to do it during these years.”
Bottom Line on Netflix Stock: Two More Important Factors
There are some other issues to consider with Netflix stock. To date, the company has enjoyed some pricing power, but Apple and Disney are offering their streaming services at points that will likely push Netflix to trim prices, resulting in lower revenue per subscriber.
Additionally, there remains some burden on Netflix and its rivals to come up with compelling original content. The aforementioned Harvard research confirms as much.
“We Found that offering original content can be one important way that streaming services can differentiate their offerings from competitors’,” according to the Harvard research team. “This finding both corroborates current trends around original content and shows that early streamers were already providing clues that this trend would emerge. The latter point highlights the value in learning what drives (and doesn’t drive) early movers: The firms that most quickly understood the importance of original content stood to gain the most.”
For the good of Netflix stock, the company needs another “Orange is the New Black” or “Stranger Things” in a hurry.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
