Netflix stock falls short of the all-time high. What concerns do investors have?

Streaming services, led by Netflix Inc., gained popularity during the COVID-19 pandemic. However, as COVID restrictions were lifted, interest in such services began to wane. In 2022, Netflix reported a significant loss in the number of subscribers. However, this decline was temporary, and the popularity of streaming services recovered. Netflix navigated this challenging period and reported a record number of subscribers in Q2 2024, solidifying its status as the global leader in this segment. This development pushed the company’s stock close to an all-time high. This article will detail the results of Netflix’s fundamental and technical stock analysis, assess the company’s outlook for 2024, and outline the risks associated with investing in Netflix shares.

About Netflix Inc.

Netflix Inc. was founded on 29 August 1997 by Reed Hastings and Mark Randolph. The company was initially in the business of delivering DVDs on a subscription basis. Clients could order a film through the website and receive it by post. In 2007, Netflix launched a streaming service, allowing users to watch movies and TV shows online via the internet.

The transition to live streaming was pivotal in the company’s history. Netflix began actively expanding its content library to include licensed films, series, and original projects. By July 2024, Netflix had 277 million subscribers worldwide, making it the largest streaming platform.

Netflix Inc.’s Q2 2024 report

Netflix released its Q2 2024 report on 18 July. Below is a comparison of its data with the corresponding period in 2023:

• Revenue - 9.56 billion USD (+16.8%)
• Net income - 2.15 billion USD (+44.0%)
• Earnings per share - 4.88 USD (+48.0%)
• Operating profit - 2.60 billion USD (+44.0%)
• Operating margin - 27.2% ​ (+490 basis points)
• Total subscribers - 277.65 million (+16.5%)

Although the company has increased the number of subscribers quarter over quarter, this growth is gradually slowing. The increase in memberships in Q4 2023 surpassed previous figures by 13.13 million, followed by 9.32 million in Q1 2024 and 8.05 million in Q2 2024. Netflix is facing challenges in finding new catalysts for membership growth. It is currently attracting new subscribers by addressing password sharing and reducing the cost of the ad-supported subscription plan. However, this approach may only offer a temporary solution. Market participants are sensitive to these statistics; for instance, when Netflix reported a loss of 200K subscribers in Q1 2022, its share price fell by over 30% and continued to decline further.

Netflix Inc.’s stock chart

To mitigate such issues, Netflix’s management plans to stop publishing subscriber statistics from 2025 onwards and focus investor attention on revenue per user, total revenues, and operating margin.

Amid slowing membership growth, the company seeks new growth drivers, with the advertising business viewed as a potential source. Netflix’s management has noted that advertising is becoming increasingly significant to the company’s operations. However, since building this business from scratch will require time, it will unlikely become the primary driver of revenue growth in 2024 and 2025.

Netflix Q3 2024 forecast

Netflix expects a 14% year-over-year revenue growth for Q3 2024, although the influx of paid memberships is projected to be lower than in 2023. Furthermore, no changes are anticipated in the global average revenue per user.

In 2024, revenue may rise by 14-15% compared to the previously anticipated 13-15%, while the operating margin is projected to be 26% compared to the previous 25%. Annual growth in the operating profit remains the company’s target.

Netflix Inc.’s promising business lines

With the streaming market now established, acquiring new users largely depends on attracting them from competitors through compelling content. However, adjusting the subscription cost is an equally effective strategy for gaining clients. Lower prices can significantly increase the likelihood that users will opt for this platform.

Although Netflix offers diverse content that attracts subscribers, the company must address its pricing strategy. In 2022, it launched an ad-supported subscription plan, which is more affordable than the basic ad-free option. While this move results in some revenue loss from subscribers, it significantly increases revenue from advertisers.

Users have responded positively to this option. In Q2 2024, Netflix registered a steady increase of 34% in ad-supported subscriptions. To encourage the shift to this agreement type, Netflix tested a ban on access to the basic plan in the UK and Canada. The company was satisfied with the experiment results (as the number of subscribers grew) and plans to extend this business scheme to other countries.

According to the report’s comments, advertisers request that Netflix should implement all the planned advertising features as soon as possible. While this positive development will increase Netflix’s income, it also indicates problems with scaling and monetising the advertising business.

In October 2023, Netflix launched live streaming of sports events organised by the company, and it plans a full-scale entry into the live-streaming market by Christmas. A broadcast of an American football game between Kansas City Chiefs and Pittsburgh Steelers is scheduled for 25 December.

Another promising business line for Netflix is its operations in the online gaming market. In July, the company announced that it had 80 games in development and planned to release one new game every following month.

All the above indicates that Netflix has promising business areas that may increase its income and favourably impact its share value.

Technical analysis and forecast for Netflix Inc.’s stock

In 2022, when the company faced subscriber attrition, its stock price tumbled to a low of 162 USD. Subsequently, the stock began a gradual ascent, forming an upward channel. Following the release of the Q4 2023 report on 23 January 2024, which recorded an increase of 13 million subscribers, the stock price broke above the channel’s upper boundary, leading to a rise in Netflix's share value. Another upward channel then formed, characterised by more intense stock price movements. By 8 July, Netflix’s shares reached an all-time high of 700 USD before undergoing a correction.

The Q2 2024 report, released on 18 July, did not prevent the stock price from falling. Netflix stock analysis suggests two scenarios in this situation.

Netflix Inc.’s stock analysis and forecast

The primary forecast for Netflix stock anticipates a rebound from the 630 USD support level, with the price moving upwards to reach a new all-time high.

The alternative scenario involves a breakout of the 630 USD support level, followed by a decline in the stock price to 550 USD. If the US economy experiences stagflation (a concern raised by experts), Netflix’s stock price could plunge to 350 USD. Conversely, a rebound from the 550 USD level might indicate the completion of the correction and the beginning of a new prolonged upward movement.

Risks of investing in Netflix Inc.’s stock

Investing in Netflix stock carries risks and potential challenges for the company. These include:

• Competition - major competitors with streaming services such as Disney+, Amazon Prime Video, HBO Max, and Apple TV+ are expanding their content libraries and subscriber bases. The company also faces competition from local market players who may offer more relevant content to regional viewers
• Content costs - producing high-quality original content requires significant investment. High costs may impact the company’s profitability
• Market saturation - growth in subscriber numbers may slow down in countries with high streaming service penetration
• User reaction to ads - although users are currently accepting of ads and subscribing to the ad-supported plan, a shift in user sentiment could significantly harm the company’s financial position
• Advertising model efficiency - it remains unclear whether Netflix’s advertising model will be successful and capable of compensating for the lost income from traditional subscriptions

Despite considerable growth opportunities and innovations, investments in Netflix are associated with multiple risks. Therefore, all the relevant factors should be considered when making investment decisions.

Summary

The Q2 2024 report indicates that the company is financially healthy, and promising business areas suggest further revenue growth potential. From this perspective, the stock appears attractive for investment. However, its price has surged by over 100% in the past nine months, and a corrective price decline is typical in such situations.

In this report, investors were dissatisfied with the pace of monetisation of the advertising business. They believe the process is progressing too slowly, and subscriber growth may stall before the company fully implements and monetises its advertising business. Consequently, there is reason for a correction. Addressing this issue could increase interest in Netflix stock.