Netflix, Inc.: Slowing Subscriber Growth No Reason to Bail on Netflix Stock

Netflix, IncNetflix Stock Still Has Upside Despite Issues

There is no question that Netflix, Inc. (NASDAQ:NFLX) has reached a critical moment. Netflix stock is under pressure, having lost more than 18% year-to-date. The big question shareholders are asking is whether this is a temporary weakness or the reflection of a chronic problem affecting the company in an increasingly competitive market.

Netflix, once the unchallenged platform for on-demand video, which seemed to have no end to growth, gained significantly fewer users in the second quarter. Netflix stock has plummeted as a result. In the past three weeks alone with shares dropping 5.31%. Still, the situation is not as dire as the headlines and the analysts have made it appear.

Netflix is still trading at more than $90.00 per share. That’s certainly lower than its record high of $130.93, achieved last November, but it’s also in the high range for the last two years. Indeed, the stock is worth almost 55% more than it was just two years ago—when it had fewer contestants. So, take the gloom-and-doom scenarios with caution.

Fast or Not, Netflix Continues to Grow

The fact remains that whether slower or not, Netflix has shown that, if nothing else, it keeps growing. It recently reported having 83.18 million users at the end of June. Some say this is only 1.68 million more than the end of March. I say, simply, “a million more” than at the end of March. See the difference? About half of all users are in the United States. Perhaps, investors were disappointed more by the fact that Netflix missed its own expectations, rather than the user number growth rate itself. (Source: “Netflix now has 83 million subscribers, but it grew slower than ever in the U.S.,” Venturebeat, July 18, 2016.)

Indeed, Netflix told investors in April that it would reach 84 million users worldwide by July. It missed that target by about 800,000, but it attributed the lethargic outcome to an unexpected shakeup, most likely resulting from its decision to stop offering its services at the original low—“grandfathered”— prices for longtime users. (Source: Ibid.)

Three months ago, Netflix predicted it would add about two million new subscribers internationally and 500,000 in the U.S. (a total of 84 million) during this past quarter (Q2 2016). Still, it’s the cage of the quarterly reporting system that creates a cage of expectations, bound to disappoint. For example, investors are quick to punish the company for failing to match its own guidance. They conveniently forget that the stock gained a record 6.74 million registered subscribers in the first quarter, following its launch in 130 new countries.

Netflix Is Already Performing Better

It seems that many investors still have some optimism left. To the question that analysts have posed—whether its weakness is due to temporary factors or structural competitive forces—Cannaccord Genuity, which recently started covering Netflix, is betting on the temporary blip explanation. It has set a $119.00-per-share price target for NFLX stock. (Source: “Netflix Inc. (NFLX) Given New $115.00 Price Target at Canaccord Genuity,” BBNS, July 19, 2016.)

Indeed, there’s more reason to be bullish than bearish on Netflix in the longer term. The company’s management explained, its slower user growth rate was disappointing but it had little to do with customers choosing competitors such as Hulu or Amazon instead. New tariff plans, as well as the Olympic games and the Euro 2016 soccer championship, which drew record viewers in Europe and even in Canada—one of the company’s top markets—may reduce the viewings of its programs. The Copa America soccer championship also drew big crowds in the same period. (Source: “ESPN averaging 815k viewers for Euro 2016 matches,” World Soccer Talk, June 30, 2016.)

The Bottom Line on NFLX Stock

The price drop might be an opportunity, considering Netflix’s determination to expand internationally, which gives it considerable ground to conquer with relatively little competition. The fact that it is taking the challenge by investing in content—specifically, culturally relevant content—is certainly emblematic of its determination to succeed.

But the seed has spread. It has a presence in almost every country of the world, offering original content that has garnered many devoted fans with shows such as House of Cards and Orange Is the New Black. Alternatively, consider that Netflix is a cultural phenomenon in itself that will not be going away.

Should its fortunes turn in a decidedly southerly direction, it remains an appetizing takeover target from such giants as, Inc. (NASDAQ:AMZN) or Apple Inc. (NASDAQ:AAPL), which would love to absorb its popular series and users. Ultimately, the bullish case for Netflix remains strong.