Netflix, even with Stranger Things and other hits, may see more subscriber losses

Ethan Miller/Getty Images News

Netflix (NASDAQ:NFLX) may be on track to lose more subscriptions than management indicated, despite some recent strength in returning shows such as the hit Stranger Things.

According to a report on Netflix (NFLX) from Barclays analyst Kannan Venkateshwar, overall streaming trends are heading down for the streaming pioneer of late, while rival Disney+ (NYSE:DIS) is looking relatively strong on those measures.

Netflix (NFLX) has recently dominated some eyeball share with new content in the hit series Ozark and Stranger Things. However, Venkateshwar said Netflix's (NFLX) second-quarter app download and engagement figures are declining lower, and a burst of app download activity around Memorial Day's Stranger Things release looks to have faded somewhat in June.

Venkateshwar said that perhaps because of greater streaming competition, the overall impact of Stranger Things doesn't look to be too material, and it's giving a smaller shot to Netflix's (NFLX) arm than previous seasons. Meanwhile, despite those hits and higher volume of releases in the second quarter of this year, the overall average quality of Netflix's (NFLX) new content looks weaker particularly in TV shows. Venkateshwar said Netflix's (NFLX) film quality was basically flat with the first quarter, but remained generally weaker on average than that of the company's TV shows.

"In our opinion, Netflix may need to rebalance its content mix a bit more towards quality, especially given competitive offerings from Disney (DIS), Apple (AAPL), HBO (WBD) and Amazon (AMZN)," Venkateshwar said. And the third quarter may also be tough for Netflix (NFLX) now that Disney is ramping up for the second half, HBO has premiered a new season of Westworld and has its Game of Thrones prequel on the way, and Amazon (AMZN) is launching its expensive Lord of the Rings series The Rings of Power.

That sums up to expectations that when Netflix (NFLX) reports second-quarter results on July 19, it will post 2.8M net subscriber losses, which company management has guided for a decline of less than 2M subscribers.

Venkateshwar said that for its part, Disney+ (DIS) is showing strong trends in metrics that look to have benefited from European, Middle East and Africa market launches as well as strong content such as Ms. Marvel, Obi-Wan Kenobi and the streaming release of Doctor Strange in the Multiverse of Madness. HBO Max saw growth that "moderated" in the second quarter, and Peacock (CMCSA) is pacing down with a tough comparison from the Olympics.

The biggest change to Barclays' model for Netflix (NFLX) comes in margin estimates for next year, where it's cutting to the low end of guidance from the high end - and even the low-end estimate could be at risk, "given the investment ramp required to build the advertising and gaming businesses."

With Netflix's (NFLX) stock looking expensive, Venkateshwar cut his price target on the company's sharesa to $170 from $275 - now implying 8% further downside. And with a maturing business, "the stock may not bottom until earnings multiples are more comparable to legacy media names," Venkateshwar said.

Earlier, Netflix (NFLX) looked to strike while the Upside Down was hot, confirming plans for a spin-off of Stranger Things.

Comments

[Code Talker Market Analysis]

$NFLX should try free trials to lure people in.

[nerd_rage]

@Code Talker Market Analysis Their problem is they are locked into charging too much for their mediocre content and the competition is offering a better deal, or at least fresh libraries, so people are churning.

They would have to offer free trials to people cancelling, but then everyone would hear about it, and decide to cancel too to get the freebie.

[Code Talker Market Analysis]

@nerd_rage But their subs would stay at a high count. And analysts love subs.

[born_to_run]

Nothing good to watch on Netflix it’s always the same recipe with their production. Considering cancelling.

[RonnieM.]

Netflix just paid Duffer Bros "9 Figures". Good thing Reid and Ted don't have Board of Directors. ;/

[alphakar]

What a joke, NFLX isn't going anywhere for the foreseeable future - great value here, not to mention growth when they implement the ad-based tier.

[nerd_rage]

@alphakar Competitors have ad-based tiers too or are making them. So what's NFLX's competitive advantage? They don't have one. They have a big head start, that's all, but it can be eroded over time.

[yellowpage]

@nerd_rage Scale. Netflix has 220M+ users. Disney+ is the closest with 88M (not counting $1 India users that will mostly churn away with IPL rights gone). Plus the much higher ARPU, Netflix will always be able to afford a better content slate. Aka, the virtuous cycle.

[Tdog88]

Priced in.

[Green Goblin's Dad]

I have, and like, both Netflix and Disney+ but, man, the amount of content on the two isn’t even comparable, in my opinion. Netflix just offers so much more.

[salo24]

As user I think Netflix has more content, some good, some regular, some bad, compared to Disney, Amazon or Hbo max, I have liked much more netflix series. Ozark, ST, Narcos, The witcher, Umbrella Academy, Peaky Blinders, and much more. I have the four, and surely my family spend much more in netflix than in the other three together.

[Beast23]

In my opinion it has pretty much nothing to do with the quality of the content or the variety and basically everything to do with price. The other subscription services aren’t suffering as much because they cost significantly less.

[nerd_rage]

@Beast23 That, and people have had Netflix for a while. They've gotten thru what they wanted and noticed that the quality of the new stuff being added has dropped over time. So it's natural to put Netflix on pause and go check out something new.

[yellowpage]

@Beast23 It's not even price. Netflix is saturated in US with usage in 100+M households. Sharing is the real issue.

[Beast23]

@yellowpage I hear what you’re saying but everyone I know who no longer has a solo subscription stopped because of price. When it was cheaper, people were fine with paying for a subscription without sharing now I am hard pressed to find anyone who isn’t sharing. If they somehow stop people from sharing and the price doesn’t go down accordingly I have no doubt that subscriptions will continue to fall.

[TellyS]

Blackrock ESG rating on Netflix Corporation means they have to promote social justice ideology in their programming or risk institutional investor wrath. They aren't subtle about this, and most of the programming sucks. People don't want to be lectured (poorly) to by their entertainment programming and tune out. Eventually they cancel, and on a macro-level Netflix bleeds subscribers massively, even if the company gets minor wins here and there with hit series.

Netflix also had many early market advantages and they have squandered most of them and are burning the rest. They likely will not exist as a company in 5 years.

[nerd_rage]

@TellyS It's not lecturing or wokeness. It's that NFLX has competition now and people realize they don't need to stick with NFLX and their mediocre content. When NFLX raises the price, even by $1, it just reminds people that they're free to leave at any time.

They can bop around and just skim off the best content across all the services. I think they're after two things: the big name franchises they are already fans of; and good quality content (as individually and idiosyncratically defined).

[Up and Away]

@TellyS
There was so much money flowing into the market that they started a new fund and named it ESG. It was just a name with no meaning, rules or regs. until someone said give it meaning. Today most people have no idea what it is and ignore most of what people like to think it is. Frankly while I will not call it a scam, I certainly would never acknowledge what they say about the leading streaming video company.

[Legitimate]

@TellyS Blackrock does this with all their funds. Wasn’t in GS that said they wouldn’t allow companies to IPO unless there was a “diverse” board of directors?

[Cgain]

love that analysts have all given up on NFLX, ensuring its thoroughly washed out. Really sets up well with extremely low expectations.

Long: NFLX

[SPDY84]

I love Stranger Things, but I have noticed in the last 12 months that I barely watch Netflix now and I'm watching many more Apple TV, HBO Max, Amazon Prime shows than Netflix. I have most of the services, but thinking through people that have to watch their budget, I would say that Netflix is losing ground.

[nerd_rage]

@SPDY84 I just started in on AppleTV+. Added a bunch of series and a few movies, checked out one (Severance), I'm hooked. With NFLX, I'd check out ten before I found a good one.

[SPDY84]

@nerd_rage yep. I love Severance as well. And same here. Netflix has a lot of crap.

[Up and Away]

Recession can do that. Food and other necessities will always come first for those with limited means.

[yellowpage]

@Up and Away Pay TV has always done well in the past recessions. I don't think streaming is any different. $15 per month for all you can binge is a godsend when you have too much time while unemployed.

[Up and Away]

@yellowpage
Don't disagree but pretty sure lots of families will be 'forced' to drop it. Prices and rates are only going to keep going up thanks to this administration and the war in Ukraine who supplies the world with grains (along with Russia).

[TommyIrish]

Sadly, Netflix making their own stuff is not working.

You don't believe me?

Try watching Borgen or stuff.

[Finding Your Retirement]

my biggest problem is I have no idea what I can or can't watch on netflix. Did they ever make a list of shows you can watch or are they still spamming the home screen with random shows nobody cares about

[nerd_rage]

@Finding Your Retirement First you have to start watching and rating stuff. Then NFLX's algorithm can kick in and start recommending similar stuff. Chicken/egg problem. Also back in the olden days when NFLX had a five-star rating system, it seemed a lot more accurate than now with their thumbs.

I think NFLX gets something they want to promote and tells everyone it's a 98% match. Sometimes for fun I go thru my 98% match items and I end up going nope and thumbs downing them after 10 minutes but no matter how much I do this, I still get BS 98% matches.

If NFLX really is messing with their own rating system, it's doing them no favors if people can't find anything to watch and then cancel.

[HPBunker]

@Finding Your Retirement

"Did they ever make a list of shows you can watch or are they still spamming the home screen with random shows nobody cares about"

You can mark shows with a thumbs down, but in my experience NFLX will keep popping them up in your face regardless.

What's really sad about this company is they had a great website 10 years ago. Back then, you could actually review what you watched, read other users' reviews of shows you hadn't watched yet, and mark shows that obviously didn't interest you with a "Not Interested" tag that permanently hid them from view.

Then NFLX started spending billions on their "original" content, most of which has been unwatchable garbage. The company didn't like that so many users were marking the LGBTQ pride documentary of the week or 10,000th low budget foreign horror movie as "Not Interested" and/or reviewing them poorly. So NFLX removed user reviews and the "Not Interested" button. Now their website is almost unusable, and you can never, ever get the garbage content (95% of what NFLX produces) off your screen.

[Legitimate]

@HPBunker what you describe is not going away tho. It’s just going to be continually promoted under “equal rights”. I try to ignore all of the bashing towards my gender and ethnicity. My feelings obviously don’t matter to their producers, so I ignore as much of that content as possible. They have a few decent things to watch for the $8 we pay monthly (sharing) for the service.

[nerd_rage]

"In our opinion, Netflix may need to rebalance its content mix a bit more towards quality..."

I doubt NFLX has been churning out garbage as a deliberate strategy. Talking about "quality" is a nonstarter. Everyone has opinions about what quality means and no two opinions will ever match. Companies can't just inject quality automatically into their productions and be sure it'll turn out that way. So how can we make investment decisions based on such a nebulous factor?

When I see statements like this, I mentally substitute "franchise IP" for "quality" because I think that's what they really mean. But it's not quality at all. Obi-Wan was a big hit for Disney+ but it sure wasn't quality. It was shockingly bad, really.

That's the moral of the story: Disney+ can make crap and still have a consistent parade of hits because they are basing them on franchises with a huge fanbase that just has to see what Obi Wan and the gang are up to now. Even if it's bad, it's a lot of fun to snark about online, so it's kind of a win/win proposition. Snarking about some no-name NFLX disaster just isn't nearly as fun.

And NFLX's competitors are all doing this, except for AppleTV+, and even they're doing a show based on Godzilla (!?!?)

[Analyze This]

@nerd_rage I hear you about that part about "quality". It is simply a word the author uses because no doubt the author is clueless as to a words like "cash flow" and "Intrinsic value". "Quality" is so subjective that is can have one million different definitions for every one million people/

[thehip]

@Analyze This That was a quality post.

[DC_22]

@nerd_rage Yea I read that as they really have no idea what's going on at Netflix and even lesser of a clue where the stock price is headed. Classic PT revision to essentially what they are currently trading at.

[Tdog88]

Trend is telling me it’s almsot time to buy Netflix (trend = everyone throwing in the towel and downgrading)

[Code Talker Market Analysis]

Pair trade: Sell $NFLX, buy significantly undervalued $WBD.

[dimi1234]

@Code Talker Market Analysis WBD has too much debt and can go to zero. It's cheap for a reason!

[Code Talker Market Analysis]

@dimi1234 HBO go to zero?

[dimi1234]

@Code Talker Market Analysis financial crisis happens, liquidity disappears, they can't refinance their huge debt or pay it from cash flow, they break their covenants, stock goes to zero. HBO will be fine but that won't help shareholders in this scenario.

[ccm800]

I’d consider buying Netflix under $100/share. They are just so overvalued in comparison to highly profitable legacy media companies that also have streaming (WBD, Disney, PARA).

[Maschuette]

@ccm800 disney? Disney P/E is 65. Netflix is 17.

[nerd_rage]

@Maschuette DIS has monster brands that will continue to rake in money indefinitely. NFLX has tried to create its own franchises for years with little or no success.

It would be an interesting experiment to see if Stranger Things is a real franchise. NFLX makes a big budget movie and gives it a real release, not an Oscars bait fig leaf release. Let's see if it rakes in the usual middling blockbuster total of $400M or so. Then they can claim franchise status.

WBD has real franchises that make real money, like Batman. Even the sputtering Fantastic Beasts franchise can bring in $400M.

[Maschuette]

@nerd_rage I honestly don't think they have enough content. Superhero movies, starwars, old princess movies... thats pretty much it. I'm a fan of their content and I am already super bored of it. Its already beat to death. Even if people keep showing up to B list superhero movies...and then C list superhero movies.. and the D list superhero movies...(they have 3k marvel characters so they really can make movies indefinitely) I still think they are super expensive even at their current evaluation.

[Willow Street Investments]

NFLX was popular when it was $10 a month but that price was too low...it really should have been $40, 50 or 60 a month...now people have become used to an unrealistic low monthly price.

[nerd_rage]

@Willow Street Investments NFLX would have 2 million subscribers, not 200M if they'd charged that price. The reason it grew like crazy is because it offered a ton of content at a cheap cheap price. They stole other businesses' customers, starting with Blockbuster, by offering a sweet deal. Problem is: now they have to keep offering a sweet deal. The minute they raise the price by $1, they lose a lot of folks. AppleTV+ has some great content and it's just $5/month.

And NFLX even cheaper overseas. Americans pay $14-$15/month but in Asia and Latin America, they pay significantly less. This is the problem nobody talks about: the big growth is now going to be in low ARPU regions. No reason to give up, but plenty reason to get content costs under control big time.

www.comparitech.com/...

[HavingFunToday]

@nerd_rage I think that is the problem all the streaming services will or are running into. It is expensive to produce original content or even buy content if you don't have ad supported plans it means you are always increasing subscription prices because every year content becomes more expensive.

[Cristi_an]

can someone remind me what was Barclays position regarding Netflix when their share price was north of 500-600$?

[Finding Your Retirement]

@Cristi_an buy it so my clients can dump it. if they're bearish now then it's going to the moon

[WEareBELGIUM]

@Cristi_an i wanted to write ten read your post. A year ago all was hot and flash for Netflix with crazy target prices. Now all of a sudden it is basically worth nothing.

I think Disney + is way worse in terms of quality content (same boring stuffs of Star Wars and heroes and frozen… even the dropout theranos was quite mediocre to what could have been a hbo or apple production).

Netflix will be fine. They will fix their problems and grow back up.

Ad supported tier + no more sharing we I’ll drive it towards 300M subs.

[HPBunker]

@WEareBELGIUM

"Ad supported tier + no more sharing we I’ll drive it towards 300M subs."

Sounds nice. When will NFLX generate free cash flow?