One of streaming founding fathers is falling out of favour with investors.
The pandemic came with many challenges no executive team could’ve prepared for. While a lot of businesses struggled to survive, a lot of companies benefited from this crisis. The stay-at-home restrictions created a perfect environment for Netflix, but this year, things took a turn no one expected.
In the first quarter of this year, Netflix only grew revenue by 9.8% and lost 200,000 subscribers. Shutting down its service in Russia lost the company 700,000 subscribers, but it still managed to gain 500,000 elsewhere.
This caused investors to punish the stock. To make things worse, they are forecasted to lose 2 million customers this Q2.
Co-CEO Reed Hastings mentioned competition from other streaming services as a factor to blame. Other macro-related factors, like “sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID,” also create a challenging operating environment for Netflix.
In hopes of boosting subscriber numbers, Netflix will try to convert the approximately 100 million households worldwide who “share others’ passwords” into actual customers.
Converting even a fraction of those “password sharers” to paying customers could provide a nice revenue bump in the short term. On the flip side, it could completely alienate some viewers and push them toward more affordable rival services.
Netflix may be going through a tough moment right now. The company may be close to a saturation point in the US, but there are still bigger-picture opportunities around the world with a ton of room to expand. The 222 million subscribers Netflix has right now don’t come close to the approximately 700 million households worldwide connected to the internet.
It’s not a stretch to say that Netflix is a value stock right now. The business trades at a price-to-earnings (P/E) ratio of 16.5 as of June 23, far lower than the historical 10-year average of 182. And this valuation is cheaper than the S&P 500’s P/E of 20.3.