Netflix Stock May Be in Trouble Despite Subscriber Growth

Netflix is putting up a fight as the streaming wars rage on.

The company added 2.4 million subscribers in the third quarter and projects it will keep the momentum going through the end of the year, according to its earnings report released this week. The report represents a reversal of trends after Netflix lost 200,000 subscribers in the first quarter of the year and 970,000 in the second.

Netflix's stock more than doubled in price from the start of the pandemic in March 2020, when people were spending more time at home watching TV, to November 2021, when it peaked at about $690 per share. While the stock price jumped on the most recent positive earnings report, it's still down more than 50% for the year at about $281 per share as of Friday.

Experts say the stock has struggled more recently in part due to the fierce competition in the streaming space. And as Netflix was losing subscribers earlier in the year, investors worried that the 25-year-old company had gotten so big it wouldn't be able to get much bigger, says Kenneth Leon, director of equity research at CFRA, an investment research firm.

"I think it's the law of large numbers, which happens to any successful company," he adds. "When you have 223 million subscribers, you're going to begin to see slower growth rates."

The streaming giant is trying to up its subscriber base with several major initiatives, including the launch of a cheaper plan that comes with advertisements, efforts to stop password sharing and its foray into video games.

Netflix's newer competitors: HBO Max, Peacock and more

After Netflix's struggles earlier in the year, the third quarter was stronger thanks to several massive releases including the final episodes of the fourth season of Stranger Things and Dahmer - Monster: The Jeffrey Dahmer Story.

The good news was welcome, and needed for a company with a ton of competition. Up until 2019, Netflix’s main U.S. competitors were Amazon Prime and Hulu, says Neil Macker, senior equity analyst at research firm Morningstar. Now, consumers have more decisions to make, with the launches of Disney+, HBO Max, Discovery+, Peacock and Paramount Plus.

"Everybody's got a service now and a lot of these companies are pulling their content back in house,” Macker says. “Nowadays, if you want to watch a lot of different content, there's no one service that’ll have everything, and so we'll see how many services people are willing to pay for moving forward."

What Netflix's subscriber numbers means for its stock

Companies’ quarterly earning reports give insight into their performance and can affect investors’ perceptions of how businesses will do in the future. Historically, subscriber growth has been one of the most important metrics for analysts measuring Netflix’s performance.

Despite the subscriber growth last quarter, Netflix is at a stage where it wants to continue to turn profits, but it's dealing with competition from streaming services in their growth stages that are still losing money to try to gain market share, Macker says. That's made it harder for it to grow subscribers recently.

Macker, who notes that Morningstar considers the stock to be fairly valued, says the company's performance in future quarters will depend on the success of its new initiatives and the ability of those initiatives to attract new subscribers.

The upcoming cheaper ad-based model will entice some consumers who are cost-conscious, Macker says. On the other hand, customers who are on the ad-free plan may downgrade their plans to the cheaper option to save money.

And there's more to Netflix's success than the number of subscribers. When Netflix launches the new ad plan, it could bring in $1-2 billion from advertisers and marketers in 2023 based on estimates, Leon says.

Bullish investors are hopeful the company will also be able to drive revenue by cracking down on password sharing. Netflix says it will begin charging an extra fee in early 2023 to those who are sharing an account.

There’s an opportunity for the company to reduce the number of friends and family of account holders who are freeloading and to convert some of these people into new subscribers, Leon says.

Should you buy Netflix’s stock?

Analysts and investors will be closely watching Netflix's new initiatives — and if those initiatives are successful, it could be good news for the streamer's stock price.

Overall, however, Leon does not recommend buying Netflix stock right now. He doesn’t doubt that Netflix can incrementally grow its subscribers, but he says the streaming service is just too big to scale subscribers at a fast pace anymore.

“We no longer think Netflix is a growth company,” he says. “It doesn't deserve the rich valuations of a high-flying growth stock.”

Netflix did not comment for this story beyond directing Money to its Oct. 18 letter to shareholders.

If you’re interested in Netflix’s stock, financial advisors typically recommend keeping a diverse portfolio, which means not putting too much stake into any one stock.

Investing in only one or a few stocks exposes you to extreme risk, says René Bruer, co-CEO at Smith Bruer Advisors in Colorado Springs, Colorado. For example, a company could struggle because of a bad product launch or a period of poor management, and your hard-earned savings could be wiped away.

Another option is investing in a fund like an exchange-traded fund (ETF) that contains Netflix, versus buying shares of the stock itself.

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