Wall Street is growing worried that Netflix’s best days could be behind it.
Netflix (NFLX) shares were up about 4% Wednesday even as the broader market was mixed. But Netflix (NFLX) stock had fallen for nine straight days — a stretch that included a 10% drop after the company stunned Wall Street by reporting a much smaller increase in subscribers than expected.
That’s the longest losing streak for Netflix shares since March 2014, when the stock fell for 11 consecutive days.
To put that into context, the Netflix show “Orange is the New Black” — one of its first original hits — was still a few months away from premiering its second season the last time Netflix had a losing streak this long. The seventh (and final) season of “Orange is the New Black” will drop this Friday.
During its 2014 slump, the stock lost about 8% of its value. This losing streak has been far more unkind: Netflix shares have plunged nearly 20% over the past nine trading sessions.
Investors are nervous that Netflix’s weak global subscriber additions in the second quarter are the start of a troubling trend. Even more concerning: Netflix actually lost 126,000 subscribers in the United States between April and June after the company boosted its monthly subscription price by as much as $2 a month.
No longer the only streaming game in town
Netflix may be feeling competition from Amazon (AMZN) and Hulu — and the company will soon face even more streaming rivals with the looming launches of Disney+, Apple TV and HBO Max from WarnerMedia, CNN’s parent company.
Netflix still has a lot of big exclusive programs like “Stranger Things,” “The Crown” and “The Umbrella Academy.”
So some analysts think last quarter’s results were an anomaly.
“The company appears to operate in a virtuous cycle, as the larger their subscriber base grows … the more they can spend on original content, which increases the potential target market for their service,” said Jeffrey Wlodarczak, an analyst with Pivotal Research Group, in a report after its recent earnings release.
Wlodarczak added that Netflix may remain a hit with consumers because it has continued to defy calls to launch a service with commercials, even though an ad-supported plan could be cheaper. He dubbed Netflix “an increasingly compelling unique entertainment experience on virtually any device.”
Growing need for more big hits
The challenge for Netflix is to keep churning out new blockbusters, especially as rival media companies are set to take back streaming rights of non-Netflix shows.
The approaching end of “Orange is the New Black” underscores that problem. Netflix is also going to lose “The Office” and “Friends” — two of the most widely watched shows on Netflix — in the next few years. Comcast’s (CMCSA) NBCUniversal service will be the new home of “The Office,” while “Friends” will be one of the top attractions on HBO Max.
That’s not a good sign, according to Hedgeye Risk Management analyst Andrew Freedman. He argued in a recent report that Netflix may have trouble replacing these hit programs.
Freedman also thinks the drop in US subscribers shows consumers are balking at paying higher prices. And that could become a bigger problem once Disney+ launches. It will cost just $6.99 a month, compared to Netflix’s standard offering of $12.99 a month and premium plan for $15.99 monthly.
“Investors were overestimating Netflix’s pricing power and ability to drive further adoption in key developed markets, especially given the looming competition from legacy media,” Freedman said, adding he thinks the stock will go down even further from current levels.
Netflix has hit rough patches before. As it transitioned from a DVD rental service to a streaming media company, Netflix had some growing pains. But Netflix recovered from that nasty losing streak in 2014 — and then some. The stock has gained more than 430% since March 2014, compared to a nearly 100% jump for the Nasdaq.
The next Blockbuster?
Just as Netflix helped lead to the demise of Blockbuster Video, other media and tech companies could one day kill Netflix.
Investors’ fears of Netflix’s eventual demise may be a tad overblown. However, the company could fall a lot further when you consider that the stock is still up 20% this year even after its recent slide. And shares trade at a nosebleed valuation of nearly 100 times 2019 earnings estimates. So a little caution is probably advisable.
“We think concerns around impending competitive launches will keep a bit of a lid on shares at least until we see the effect of competing services early next year,” said Instinet analyst Mark Kelley in a report after Netflix’s latest earnings.
His price target is $310 a share, which is slightly lower than the current price. In other words, Netflix could tread water for the foreseeable future.