Following a poor response to the second-quarter earnings report, Netflix, Inc. (NASDAQ: NFLX) lost its leadership among the FAANG stocks in July. Selling pressure eased in August but had again picked up towards the end of September. Concerns over subscriber additions and the amount spent on content have turned the stock bearish. The stock closed at $351.35, down 3.38% on Friday.
Netflix faces severe competition from Amazon and other traditional players
A streaming video subscriber in the US has three subscriptions, on average, according to Juniper Research. Netflix probably tops the list as it is a market leader with roughly 57 million subscribers. Netflix’s main competitors are Hulu, which has 20 million subscribers, and Amazon Prime (NASDAQ: AMZN), which has 100 million members globally, and nearly 26 million members in the US (Prime Instant Video).
Other than the ones stated above, there is a number of sprouting services for subscription video on demand (SVOD). Additionally, there are established premium channels such as HBO Now with approximately 5 million clients, CBS’ showtime with 2.5 million subscribers, and Lionsgate’s Starz with 3 million subscribers. Finally, there are dozens of SVOD services, which are genre-specific, which includes Crunchyroll and Disney’s ESPN+, both of which have more than 1 million paying viewers.
Netflix’s budding competitors could affect the company’s ability to grow revenue. To gain market share, competitors generally undercut Netflix. Recently, Disney CEO Bob Iger announced his plan to price the upcoming Disney-branded streaming service below Netflix.
The most popular plan of Netflix costs $10.99 per month. Amazon Prime charges $119 per year. Both streaming content providers raised their prices last year. As more similar services enter the market, consumers might be drawn to the most inexpensive deal. Another price hike by Netflix and Amazon could force subscribers to study other options.
In this regard, Juniper has pointed out that Amazon, which has recorded a minus 2.9% net client acquisition rate in subscribers in the US and the UK, is already feeling the heat of competitors. Even HBO Now, which charges about $15 per month, recorded a higher churn rate. So far, Netflix was the only company to weather the storm and post a positive adoption rate.
Netflix remains the king of streaming, with its stock appreciating nearly 300% in the past two years. However, profits remain low and cash flow, on a GAAP basis, remains negative. Netflix added roughly five million subscribers in the second quarter of 2018, almost in line with previous growth rates. For that, Netflix had to spend $13 billion on content programming in 2018.
It is a huge sum considering the fact that the company generated only $13.9 billion in revenue in the past twelve months. The company expects to spend between $7.50 billion and $8 billion on content this year, leading to the creation of nearly 700 new series and 80 films. The rising expenses have caused concern among investors. However, not everyone is pessimistic about the company.
Goldman Sachs believes that other analysts are underestimating the potential user growth of the company in the forthcoming years. The investment research firm has forecast 30 million in net addition in 2019 versus analysts’ estimates of 25 million. Still, fundamentally, the stock could underperform because of the issues discussed above.
Regarding the stock’s price movement, TradingAnalysis.com founder, Todd Gordon, has now reversed from his bullish call and said the following while speaking with CNBC: “Netflix has been a weaker stock than the broader Nasdaq. The broader Nasdaq and the overall stock market is showing some signs of hesitation here in the face of these rising interest rates.”
Gordon has pointed out that while the Nasdaq 100-tracking ETF (QQQ) recorded new highs recently, Netflix has failed to do so. Gordon believes that it signals weakness in Netflix relative to the market.
Technically, the stock is forming a head and shoulder’s pattern, and the MACD indicator is drifting downwards. As a result, we can expect a further decline in the price in the days to come.
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