By Liz Moyer and Yasin Ebrahim
Investing.com — Netflix (NASDAQ:) faces new competitors and an uphill battle with subscriber growth, but don’t let that sway you.
Overseas markets are a big source of growth, and the streaming giant is on better footing operationally now that production is gearing back up after lockdowns in the spring that affected the television and film production cycle.
But Netflix is losing market share and will have to fight to keep it from eroding further.
Investing.com’s Liz Moyer argues the bull case for Netflix, while Yasin Ebrahim explains why this is one stock to avoid. This is .
The Bull Case
If you’re bullish on Netflix, you’re not going to let a little lull in subscriber growth get you down.
Earlier this week, Netflix reported disappointing results. It added 2.2 million global subscribers in the quarter, but that was short of its own guidance. Profits of $1.74 a share also fell short.
The numbers even failed to meet the expectations of analysts, but several Wall Street analysts raised their price targets despite the miss, and many confirmed a positive outlook on the stock. The shares are up 50% this year.
The pandemic was a boost to Netflix’s business earlier this year as hunkered down people comforted themselves by binge-streaming. It added 25 million new subscribers in the first half of the year. The nationwide shut down of movie theaters during the worst of the spring virus wave also pushed more people seeking entertainment to streaming services like Netflix. Habits are hard to change.
Now that things are opening back up (in fits and starts), subscriber growth naturally won’t keep pace with this spring. But that doesn’t mean Netflix’s business is broken.
One metric some analysts jumped on was positive free cash flow in the quarter. Netflix has had trouble keeping this measure in the green as it spends on new content, but the company says it’s on track for $2 billion in cash flow this year and an operating margin of 19%. The CEO was optimistic on the company’s ability to maintain positive cash flow next year even as production — and spending — gets going again on new shows.
Even if new subscribers are slowing in the U.S., Netflix still has an opportunity to expand overseas, where rates are growing at 30% or more. Michael Morris of Guggenheim, who rates the stock a buy with a $570 price target, says opportunities in India and South Asia are encouraging.
High-growth, mobile markets “stay basic to the Netflix bull case,” he writes, “with native partnerships as a key driver.”
Netflix also faces new competition from Disney + as well as older foes such as Amazon (NASDAQ:) and Apple (NASDAQ:), but its content keeps a loyal following coming back for more. In the early days of the pandemic lockdowns, audiences flocked to Tiger King, a true crime documentary series.
Next up: season four of The Crown, the wildly popular Netflix original series about the British royal family. That starts streaming in mid-November.
The Bear Case
Netflix may still sit on the streaming throne, but its competitors have made significant strides and are banging at the door, threatening to usurp the streaming giant.
Earlier this month, data showed that competitors including Amazon’s prime video are starting to close the gap on the streaming giant. Netflix saw its market share slip to 25% in the third quarter from 32% in the second, according to streaming services company Reelgood.
Amazon has managed to close the gap with its prime video racking up market share of 21% in the third quarter, sharply up from 1% in Q2. Hulu, HBO Max and Disney, in third, fourth and fifth position respectively, are also chipping away at Netflix’s market share.
Following its weaker-than-expected third quarter results earlier this week, the company said performance would continue to stutter in the first half of 2021, but could recover in H2, underpinned by a heavy slate of new content.
“The state of the pandemic and its impact continues to make projections very uncertain … we expect paid net adds are likely to be down year over year in the first half of 2021 as compared
to the big spike in paid net adds we experienced in the first half of 2020,” Netflix said.
But some question whether subscriber growth will return in a meaningful way next year, when the potential of a Covid-19 vaccine may see countries lift restrictions rapidly, leading to
weaker streaming demand.
“I would have seen Netflix, frankly, as a stock to avoid, should there be, for example, a vaccine, or should lockdowns ease greatly,” Alex DeGroote, who owns DeGroote Consulting, said in an interview on CNBC.
That echoed similar sentiments from Benchmark Capital Partners, one of the five Wall Street firms with a sell rating on the stock.
“Despite high customer additions and lower churn, we are concerned with mounting streaming competition, potentially restricted pricing power from a global economic downturn
and surveys suggesting that streaming services are among the first household budget items to be cut with job losses,” Benchmark said in April.