Is a Turnaround Near for Netflix?

Since posting an all-time high last November, shares of Netflix (NFLX) plunged to a 5-year low in May and have been trading sideways just above that low ever since.  However, investors are hoping that the launch of a much-anticipated advertising-supported service this year and a crackdown on password sharing can help reverse the company’s loss of subscribers and provide a new revenue stream.

Investors are hoping that additional bad news from Netflix may be already reflected in the stock and that better-than-expected earnings results could spark a rally. Netflix reports Q2 earnings results today after the close.  The company has said it expects to have lost 2 million customers in Q2, even with the huge success of the fourth season of the show “Stranger Things.”

The current price of Netflix already reflects plenty of bad news as the stock trades at 2.5 times estimated sales, its lowest level since 2013 and well below its 10-year average of 5.4 times estimated sales.  In comparison, the Nasdaq 100 Index is priced at 3.6 times forward sales. Netflix has plunged -68% this year, the largest drop in both the S&P 500 ($SPX) (SPY) and Nasdaq 100 ($IUXX) (QQQ).  The company faces mounting competition, customers whose finances are being pinched by inflation, and the end of the pandemic-fueled streaming boom. 

After shunning the idea for years, Netflix plans to introduce an ad-supported service by the end of this year.  Last week, Netflix picked Microsoft (MSFT) as its technology and sales partner for the ad-supported service, and its stock has gained more than +9% since the announcement.  Global X ETFs estimates the ads can bring in $500-$625 million in quarterly revenue for Netflix.

Rivals of Netflix, including Walt Disney (DIS), Paramount Global (PARA), and Warner Bros. Discovery (WBD), have also seen their share prices taking a beating, losing a quarter of their market value or more over the past three months.  However, the rivals have priced their subscriptions at considerable discounts versus Netflix to attract users, a sign that Netflix might attract new customers with a lower-priced, ad-supported service.  Global X ETFs said, “Disney+ is clear evidence of how effective subsidized plans can be in spurring growth, and Netflix could end up doubling its total subscriber base in 2-3 years.”

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