There was a time, a few years ago, when it was easy to recommend Netflix (NASDAQ:NFLX) stock. Back then, the streaming company was quickly gaining subscribers.
However, circumstances have changed and Netflix is actually losing subscribers. Granted, traders are buzzing about Netflix’s likely soon-to-come ad-supported tier. However, investors shouldn’t be overly bullish as introducing ads won’t necessarily solve Netflix’s problems.
It was a bold move for Netflix to switch its business model from shipping out DVDs to people’s homes to streaming content directly to the consumers. Netflix was an early mover in this regard, and the company’s investors reaped the benefits.
Fast-forward to 2022 and Netflix’s competitors are fierce and numerous, and they have deep capital resources. As Netflix considers a modified business strategy, financial traders might wonder whether this is an act of desperation – and should consider simply staying out of the trade.
What’s Happening with NFLX Stock?
A year ago, NFLX stock sailed to $690 and it felt like the buying activity would never cease. Fast-forward to October of 2022, and the shares traded in the $200s.
With that, Netflix’s market capitalization shrank to slightly more than $100 billion. It’s a devastating loss for the shareholders, and there’s no consolation prize as Netflix doesn’t pay a dividend.
This share-price action reflects a number of factors, but perhaps the most significant one is Netflix’s recent lack of subscriber growth. During the three months ended June 30, 2021, Netflix added 1.541 million memberships globally. It was a real shocker, then, when Netflix actually lost 969,000 memberships in three months ended June 30, 2022.
Don’t Expect Ad-Supported Service to Save Netflix
Clearly, Netflix has to take action to turn the ship around. The buzz on Wall Street is that Netflix will introduce an advertisement-supported service tier. However, Netflix’s statement on this matter isn’t decisive.
“We are still in the early days of deciding how to launch a lower-priced, ad-supported tier, and … So this is all just speculation at this point,” the company said.
Already, we’re starting to get the idea that Netflix doesn’t have a crystal-clear action plan here. Frankly, it’s questionable whether adding ads would meaningfully bolster Netflix’s bottom line. Some marketing experts feel that Netflix would charge advertisers too much.
Benchmark analyst Matthew Harrigan expanded on that line of criticism, accusing Netflix of having “hubris” based on “likely unrealistic pricing expectations for limited ad tech capabilities in an uncertain market.”
Thus, just as viewers won’t likely enjoy sitting through advertisements, advertisers won’t enjoy paying high prices. All of this only adds to the anxiety as Netflix considers a low-probability business strategy shift.
What You Can Do Now
Netflix was once the undisputed heavyweight champion of streaming content providers. Lately, though, the competition is creeping up on Netflix and the company is starting to appear desperate.
Some of Netflix’s investors may be counting on the addition of an advertisement-supported service tier to solve the company’s problems. This could turn out to be a fantasy, though, so it’s wise to stay tuned but refrain from buying NFLX stock now.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.