Netflix (NFLX) has been on a wild ride after reporting slowing subscriber growth in the fourth quarter, amid an already crowded streaming landscape.
The stock plunged more than 20% following the results, which showed a relatively weak 8.3 million subscribers in Q4. The platform also forecasted a net add of only 2.5 million subscribers in the current quarter, compared to 3.98 million during the first quarter last year.
The streaming giant's currently trading between a range of $350-$375 per share. The stock popped by nearly 5% in Thursday's pre-market session after billionaire Bill Ackman revealed his hedge fund purchased more than 3.1 million shares of the company.
We recently purchased more than 3.1m shares of @Netflix which makes us a top-20 holder. I have long admired Reed Hastings and the remarkable company he and his team have built. We are delighted that the market has presented us with this opportunity. https://t.co/BNx1EWUVGh
— Bill Ackman (@BillAckman) January 26, 2022
While some analysts have argued that this is not the time to panic, others say this a reckoning that's been a long time coming.
"The market is sort of reconciling to reality," New Constructs CEO David Trainer told Yahoo Finance during an interview this week.
The analyst, who has a current price target of just $170 per share, said his bearish outlook seeks "to hold the business accountable to its valuation" — which he called "really outlandish" given Netflix's cash burn and a negative cashflow that's set to worsen.
Trainer argued that the market is "waking up to the fact that competition is crushing Netflix," doubling down that "the dream is over."
Netflix did acknowledge that competition may be "affecting marginal growth some" during its earnings call last week. While the company still leads in paid users — Amazon (AMZN) Prime Video has 175 million subscribers and Disney’s (DIS) Hulu, Disney+, and ESPN+ have a total of 179 million subscribers — other streaming peers are quickly catching up.
In 2021, the stock underperformed the S&P 500 (^GSPC) after a blockbuster 2020 that saw streaming players soar on the wings of COVID-inspired "stay at home" trades.
Fueled by the shift to remote work and online school, subscriber numbers surged by a record 25.9 million additions in the first half of that turbulent year before dropping off significantly, as the effects bolstering the "stay at home" trade ran its course.
Still, despite pandemic-driven ebbs and flows, Netflix has upside potential to capture more international markets with BofA seeing "continued growth in Asia" as a key driver in 2022.
Trainer, however, is not convinced that international growth will be enough to drive the company back to profitability.
"International markets are the least profitable...[Netflix] doesn't really make money on those subscribers. That's where most of the growth has been coming from, which is why they remain cashflow negative," he explained.
"Netflix is just a loss leader"David Trainer, New Constructs CEO
In an effort to increase profit margins, Netflix hiked prices of its U.S. basic plan by $1 to $9.99 per month. A standard plan now costs $15.49 (up from $13.99.), and the company's premium plan increased to $19.99 per month, from $17.99.
Netflix COO Greg Peters said during its earnings call that "customers are willing to pay for great entertainment," with fan favorite originals including "Ozark," "Bridgerton," "Stranger Things" and "The Crown" all set to make triumphant returns this year.
Yet, despite the content surge, Trainer argued Netflix is "losing money" on these fan favorite shows, as subscriber growth remains the only way for the streamer to offset costs.
"Netflix is at a major competitive disadvantage to firms like Disney (DIS) [because] Disney has more ways to monetize content than streaming. Streaming is a commoditized business...and you need other ways to monetize that content if you want to have a sustainable platform," the analyst told Yahoo Finance.
"All streaming is is just another way to onboard customers, and it can be a loss leader for these other firms because they already make money. Netflix is just a loss leader," he continued.
The strategist added that his $170 price target is "fairly generous" considering the company is "not making any money with its current model."
As Netflix looks to potentially wade into the world of gaming, Trainer asserted that it's not a realistic avenue for monetization, given that the streamer would have to compete against mainstay players like Microsoft (MSFT) and Sony (SONY).
"Netflix doesn't have a chance to compete with those firms," the analyst said.
"Gaming is an extremely capital intensive business, just as content creation is extremely capital intensive. In order for Netflix to go toe-to-toe with those incumbents, they'd have to spend tens of billions of dollars, which they can't do. investors don't have the appetite for that," Trainer maintained.
Overall, he believes that Netflix will eventually run out of air— pushed out by competitors and an unsustainable profit model.
"I just don't think it's a really good business — not as good as it's been hyped up to for people to believe," he added.
Alexandra is a Producer & Entertainment Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193