Streaming giant Netflix (NFLX 0.08%) have seen red over the last year. The company’s stock is down 58% in the last 12 months due to some headwinds (more on this below). However, Netflix stock has shown a strong performance in the last three months with the stock up more than 41% in this period.
Can Netflix maintain this advantage and maybe even extend it in the coming months? It’s hard to say, but there’s good reason to be optimistic about the company’s future in the near future. Let’s consider two reasons why Netflix’s stock might be dropping.
1. Netflix can start getting new subscribers again
One of the main reasons Netflix has been under pressure lately is the company’s sluggish user growth figures. The streaming pioneer has lost subscribers, and combined with the increasingly competitive landscape of the streaming industry, that doesn’t bode well for its future. Netflix ended the second quarter with 220.67 million paid subscribers, down 970,000 compared to the previous quarter.
However, Netflix expects to return to subscriber growth during the third quarter. Management is guiding for one million net new subscribers for the period. While that would be a decrease compared to the 4.4 million new subscribers added during the previous year period, it is still the opposite of the recent trend.
Keep in mind that corporate audiences surged during the early days of the outbreak. What we are witnessing in terms of lower (and sometimes negative) user growth is a period of adjustment, given the increasing numbers we saw earlier in the pandemic. However, Netflix’s user growth has been disrupted by the headwinds related to the pandemic.
2. Netflix’s new source of revenue
Netflix’s problems with intense competition and password sharing have caused management to consider new opportunities. First, the company plans to introduce a subscription option that displays ads. This option will be cheaper than its current plans, between $7 and $9 according to some reports, potentially attracting price-sensitive consumers who can pick and choose from more streaming services than ever before.
Second, Netflix estimates that more than 100 million households have access to its platform thanks to password sharing. In other words, millions of viewers enjoy Netflix for free. The tech giant’s ad-supported tiers could help it convert some of this audience into paying customers, but it also tests the added cost of password-sharing households in certain markets.
According to preliminary reports, Netflix itself estimates its ad-supported plan – which will premiere in early November – could attract around 40 million subscribers in the third quarter of 2023.
Apart from new customers, the company will also generate revenue from advertising on its platform. Oppenheimer analyst Jason Helfstein predicts Netflix will amass $4.6 billion in ad revenue by 2025. That would represent only 15% of the company’s revenue over 12 months, but coupled with new subscriptions, the ad-supported tier could work wonders for Netflix.
These developments could help the company expand its recent stock market gains.
Don’t focus too much on the short term
It is always difficult to predict the short term swings of the stock market. Netflix stock could fall once again if it fails to meet its subscriber guidelines in the third quarter. In addition, the economic landscape remains complicated with high inflation, among other problems. These market-wide problems have affected advertising spending, leading to lower revenues for companies that rely on advertising to generate most of their sales, including Rokuanother streaming giant.
That’s why investors shouldn’t take advantage of Netflix too much in the last three months. Instead, it is best to focus on the company’s long-term prospects, which remain strong. Netflix’s new level of ad-supported will help with user growth. Enterprise engagement continues to increase as streaming takes up more and more people’s viewing time. In August, streaming accounted for 35.0% of television viewing time in the US, compared to 34.5% for cable.
Note that streaming outpaced cable in this category for the first time in July. And in August, Netflix alone accounted for 7.6% of viewing time in the series that led the way with AlphabetYouTube. There is still a lot of room for growth in the streaming industry around the world as it has not yet reached the same level of penetration in many countries as in the US
Netflix’s solid name recognition (has achieved the rare feat of being a verb), a savvy content strategy, and increased engagement will help it deliver solid long-term returns from now on.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bakiny Junior Prosper have a position on Roku. The Motley Fool has a position and recommends Alphabet (A share), Alphabet (C share), Netflix, and Roku. Motley Fool has a disclosure policy.