Netflix Stock Still Down 50%

Netflix Inc. (NASDAQ: NFLX) posted quarterly earnings well above Wall Street expectations, and the shares surged over 10%. This is the current headline about how the stock has done. What is forgotten is that shares remain down almost 50% this year. Netflix has enough major competition that it may never recover that lost ground.

Revenue for the quarter was an unexpectedly strong $7.926 billion, up 5.9% from the same period last year. This growth is extremely slow compared to most of the past 10 years, but investors thought the number would be worse. Earnings were $3.10 per share, down from $3.19 last year. It was a drop, but investors again believed it would be lower. The big surprise was that paid subscribers grew 4.5% to 223.09 million. Analysts expected the increase to be 2.0%.

Management’s comments pointed to improved execution: “After a challenging first half, we believe we’re on a path to reaccelerate growth. The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day.” This is partially true, at best.

Netflix’s strategy remains confusing. It will have an advertising-supported service that will cost subscribers less each month. However, there is no guarantee it can sell ads in great numbers. Management said people would no longer be allowed to share passwords. That may alienate hundreds of thousands of customers, while it gets Netflix no financial gain.

While Netflix management said it is “winning the competition for viewing,” it is impossible it can be certain of that fact. Amazon Prime may be “winning” better. The same holds true with Disney+ and a dozen other large services. Each will have to report third-quarter results before the Netflix statement can be tested.

Netflix subscriber numbers have not hit a wall because of better or worse programming primarily. Amazon Prime has nearly as many subscribers and invests as much, or perhaps more, in content production. Disney+ has the Disney, Star Wars, Marvel and Pixar film libraries. Hulu has a large library of its own content and inventory from other producers. The same holds true of HBO Max and Paramount+.

The largest problem for all these industry leaders is Apple, which has one of the strongest balance sheets in the world and has tens of billions of dollars in cash. It also has an installed base of billions of iPhones and Macs. And it has one of the most visible brands in the world. Apple TV+ is new to the market, but its ability to pay for programming and push that programming to the people who own its hardware is staggering.

Netflix stock jumped 10% on good earnings news. It still has to double to get back to its peak. There are several reasons that will not happen.

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