According to the perma-bulls, Netflix (NASDAQ:NFLX) made a brilliant move in adding commercial-supported membership tiers recently. However, NFLX stock is still far from a real recovery, and Netflix management’s latest ideas aren’t a guarantee of success. Even the much-touted ad-supported service strategy could backfire.
People sometimes call Netflix the streaming king, but this is now a crowded field. Netflix’s competitors are nipping at the company’s heels and threatening to steal market share.
Perhaps this is why Netflix’s management wants to try out new ideas. Investors might be encouraged by this, but be careful. Not all new concepts are good ones, and when they go wrong, the negative impact on a company’s top and bottom lines can be substantial.
Don’t Deny the Downtrend in NFLX Stock
When NFLX stock hovered near $700 in October of 2021, value investors probably should have seen the red flags waving. It was an epic melt-up, but Netflix’s price-to-earnings (P/E) ratio definitely needed to deflate.
The Netflix share price has recovered somewhat from its summer 2022 bottom, but there’s no guarantee that this was actually the bottom. In any case, there’s no denying that the stock is still in a downtrend over the past year.
During that year, Netflix’s management has mulled a number of changes in an attempt to catalyze a recovery. For instance, Netflix reportedly bid to purchase the streaming rights to a European tennis tour, but then dropped out. Apparently, Netflix also considered buying UK rights to the Women’s Tennis Association and cycling competitions and even considered purchasing the World Surf League.
Those ambitions haven’t worked out, so far. Meanwhile, Netflix is also evidently planning a foray into video games. This means the company would face stiff competition from gaming businesses with decades of experience and brand-name recognition.
Ad-Supported Services Aren’t a Surefire Winner
The one gamble that seems to be enticing investors into the fold, however, is Netflix’s venture into commercial-supported subscription tiers. This, supposedly, will be Netflix’s savior.
Yet, it’s generally not a great idea to assume victory before some time has passed and Netflix can prove that ad-supported services are worth the trouble. After all, some Netflix users might cancel their subscriptions if they switch to a free or reduced-cost one.
It’s no secret that Netflix’s subscriber growth slowed earlier this year. Streaming commercials might not be the solution, though. To be honest, some people hate advertisements and that’s why they’re watching Netflix in the first place. Otherwise, they could just watch television.
Besides, not everyone is bullish on Netflix’s pivot to ads. In fact, Needham analyst Laura Martin expressed concerns that Netflix could experience negative revenue growth in 2021’s fourth quarter or in 2023 if “more $16-a-month or $20-a-month U.S. subscribers trade down to its new $7-a-month ad-lite tier than Netflix and consensus expect.”
What You Can Do Now
Netflix doesn’t deserve an “F” rating now as the company is still a strong competitor in the streaming space. However, a “D” rating is justified as Netflix hasn’t conclusively demonstrated that its latest ideas will actually benefit the company.
Among those ideas is advertisement-supported subscriptions, which could cause Netflix to lose some paying customers. So, don’t feel the need to jump into NFLX stock now as it might not break its yearlong downtrend for a while.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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