Why is everyone talking about Netflix shares?

Netflix (NFLX -0.11%) has gotten a lot of attention lately, but unfortunately for the wrong reason. The streaming pioneer recorded its first quarter of subscriber losses in over a decade, pointing to growing competition, account sharing, and the reversal of the pandemic boom as reasons for the decline.

These headwinds have been significantly negative, causing the share price to drop by 71% from its 2021 highs. Let’s take a closer look at why everyone is talking about Netflix shares.

A family on a sofa watches television.

Image source: Getty Images.

1. Netflix faces growing competition

Netflix isn’t just competing with rival streaming services, even if they are playing a role. Netflix is ​​also competing with the increase in free and ad-supported entertainment options consumers have at their fingertips: AlphabetYouTube, TikTok and Meta platforms‘Instagram has all gained popularity. Unlike Netflix, these services are free. The difference is that viewers are shown advertisements that disrupt their engagement, which they have shown they are willing to tolerate.

For years, Netflix’s management was opposed to releasing an ad-supported version of its service at a lower price. However, in the face of subscriber losses for the first time in over a decade and a share price that has dropped 71%, management has signaled that it is planning an ad-supported version that could be launched by the end of this one. year.

NFLX chart

NFLX data of Y Graphs.

2. 100 million more homes should pay for Netflix

That Netflix discovered shared accounts isn’t surprising, but the extent of sharing is a bit shocking. The figure has some investors talking about why management let it get to this level before doing anything about it. Did they believe that allowing customers to use their respective accounts made them willing to pay higher subscription prices? Or maybe developing the technology to limit sharing is expensive and the company would rather spend money on creating content?

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Regardless, Netflix essentially has 100 million customers using the service without paying. Interestingly, launching an ad-supported version will help solve this problem, albeit not entirely. Netflix can show advertisers that the service is being used in 222 million paying households and another 100 million non-paying households. In this way, Netflix could derive a larger budget from marketers who would be willing to pay more because they have the opportunity to influence 100 million more families.

Netflix grew to earn $ 29.7 billion in revenue in 2021 without any advertising support. An additional income stream could increase to that closest to $ 40 billion in just a few years.

NFLX revenue chart (yearly).

NFLX Revenue (Annual) data of Y Graphs,

3. People are streaming less content now

During the pandemic-plagued first year of 2020, Netflix added 36.6 million streaming subscribers, 8.7 million more than the 27.9 million added in 2019. That growth acceleration was impressive from a company the size of Netflix, which was already an industry leader. However, momentum slowed in 2021, when Netflix only added 17.2 million subscribers.

It’s only getting worse when Netflix lost 200,000 subscribers in the first quarter and expects it to lose another 2 million in the second quarter. This downward trajectory is worrying news for shareholders, who are uncertain how far it will go. Will the service eventually lose all 36.6 million added subscriptions in 2020? It seems unrealistic. Will it lose the 8.7 million incremental subscribers added in 2020 over 2019? It is more likely. Will it reverse things in the third quarter and start growing again? It seems very likely.

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The changes taking place on Netflix are definitely noteworthy. It is clear why investors are thrilled with its shares.

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