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A Reduction in Subscriber Growth Is a Problem for Netflix Stock

James Brumley

Netflix (NASDAQ:NFLX) got what looked like good news about subscriber loyalty recently, but it isn’t great news for Netflix stock.

A Reduction in Subscriber Growth Is a Problem for Netflix Stock

Source: Flickr via Mike K.

Most Netflix subscribers say they’re not interested in also subscribing to the rival service offered by Disney (NYSE:DIS), called Disney+, set for a November launch. And, most Netflix customers are also not planning on plugging into Apple TV+ from Apple (NASDAQ:AAPL) when it debuts early next month as well.

There are some problems with Piper Jaffray survey though. One of them is, consumers often say one thing and do another, especially once a new product is embraced by others. Also Netflix may not lose customers to its young rivals, but Netflix stock is priced as if the streaming service will continue to add new members at its previous pace. At the very least, Apple TV+ and Disney+ could slow that pace down.

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The Piper Jaffray Survey and Netflix Stock

The poll was taken in September, once consumers knew everything they could feasibly know about the on-demand video newcomers. At that time, 28% of Netflix subscribers said they would pay $7 per month for Disney+, while 72% said they wouldn’t.

As for Apple TV+, 23% of Netflix’s existing customer base said they had plans to add Apple’s new offering to their entertainment mix, while the other 77% wasn’t interested.

The even-better news: Of the current Netflix users who did plan on subscribing to another service, the “vast majority” of them reported they’re still likely to remain plugged into their Netflix service. Presumably, most of them know that on a quality/quantity basis, Netflix is still the creme of the crop.

It’s a bit premature for NFLX stock owners to breathe a sigh of relief, however.

Working Against Netflix Stock

Sure, they say they’re disinterested now. Social proof is a powerful force though. Once the crowd that does sign up for Disney+ is talking about exclusive programming with the Netflix-only crowd (shows like the Star Wars spinoff called the Mandalorian, all 30 years of The Simpsons, and more) Netflix subscribers might feel as if they’re missing out.

Ditto for Apple TV+, which boasts exclusives like Oprah Winfrey’s newest show, a dark comedy about Emily Dickinson and a new series from sci-fi genius Ron Moore, just to name a few.

It may well be the case that Netflix’s existing user base mostly plans on sticking around. But, the advent of two high-quality alternatives could easily slow down the pace at which new members are added.

That’s a problem. Remember, even with 151 million paying subscribers as of the end of this year’s second quarter, Netflix still isn’t cash-flow positive.

Moody’s commented in July it believed Netflix could generate positive cash flow sometime within the next five years. But, that outlook was predicated on a subscriber base of 200 million … a figure that jibes with other minimum headcounts that could get Netflix into the black in all ways.

That last 50 million or so, however, just became much more difficult to reach.

What you’re left with is a stock of a company moving into a headwind priced at 46 times next year’s projected earnings.

Netflix Should Worry About Hulu

It may seem to be a trivial detail, but Piper Jaffray’s poll only appeared to ask existing Netflix members if they intended to sign up for Disney+ or Apple TV+. It made no mention of Hulu, which is majority-owned by Disney.

More specifically, it didn’t ask respondents if they were interested in subscribing to the Hulu/Disney+ bundle the company has already said it would be offering at a very reasonable $12.99 per month. That price also includes ESPN+.

Netflix should be worried. While it’s still the king of streaming, even before Disney+ came into view this year, Hulu was the new king of growth. Last year, Hulu added more paying members than Netflix did. and has continued to outpace Netflix through the first half of this year.

It would be naive to think adding ESPN+ and Disney+ to the mix for little more money couldn’t or widen deepen the disparity of their respective growth paces.

Bottom Line for Netflix Stock

Don’t misread the message. Netflix isn’t doomed. It’s still the premier over-the-top television brand. Being the best and biggest in the business doesn’t inherently make for the best investment, however.

NFLX stock is valued based on comparisons to its own history and plausible future. That future just became dramatically dimmer, as shares were priced richly on the assumption that Netflix would grow into that valuation by adding more subscribers. Merely keeping most of the ones it has isn’t enough.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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