Netflix has had its share of ups and downs in recent years. The company recently underperformed on its subscriber guidance three times out of the last five quarters, with its stock down 70%1 YTD, and trading at prices similar to 2017.
Next week, the streaming giant will release its second-quarter earnings report to investors, highlighting the current status of the company’s growth. Until then, Netflix may need to keep an eye out on rising inflation, as consumers are downsizing on expenditures and removing unnecessary wants2—could Netflix be next?
Essential vs non – essential
When prices rise, consumers often start examining their purchases in a different light. They think long and hard about whether they really need that item to begin with, rather than just assuming it’s worth buying when the price is lower. The gap between what people need and what they merely want is the subject of a long-running debate among economists, and has been split into two broad economic sectors: consumer discretionary and consumer staples3.
The consumer discretionary industry includes companies that sell nonessential products and services, such as clothing, electronics, and entertainment. These goods are typically not essential to one’s well-being or survival. Unlike consumer staples such as food, water, and household/personal products, consumers purchase these items regardless of the economic state of the market.
Though streaming services have dominated our media consumption habits, Netflix still falls under the consumer discretionary sector. And with consumers increasingly pressed to conserve their spending, some will find themselves questioning whether Netflix’s service is a necessity.
In its most recent earnings report, Netflix shocked investors after it reported a 200,000 subscribers loss from the previous quarter to 221.6 million from 221.8 million, marking its first such decline in over ten years4. In addition, the company also projected a loss of 2 more million subscribers5 in its upcoming quarter, a tenfold increase from the previous quarter’s loss. This news understandably unnerved investors concerned about how long or deep the trend might go. However, it’s important to note that the subscriber drop in the first quarter came when the company suspended service in Russia, which led to a net loss of 700,000 subscribers6.
Netflix also pointed to its recent competition, which included the launch of streaming services by its legacy entertainment rivals, as well as the increase in password sharing, as key factors in the slowdown in paid subscriptions7. The streaming industry is getting more competitive, as companies invest billions of dollars in original series and movies. As streaming media becomes more popular, traditional media companies are adopting recurring-revenue subscription models and new streaming services are popping up every day.
Unlike its competitors—Disney+, Apple TV, and Amazon Prime—Netflix’s profitably is dependent on its on-demand video streaming services and subscriber growth. In January 2022, Netflix increased its subscription prices and cracked down on password-sharing among its customers.The price increase now places Netflix on the high end of streaming video, competing with the likes of HBO Max.
When Netflix had a few competitors and was half the price many people turned away from cable subscriptions to streaming. Now as the market gets more saturated and Netflix increases prices, consumers seem to be reconsidering their loyalty – Netflix has seen its U.S. market share decline from 52.4% in Q1 2020 to 42.4% in Q1 2022.8
As the cost of living continues to rise, Netflix’s brand loyalty will likely be tested as cost-conscious consumers look for ways to save money. However, more will be revealed in the company’s Q2 earnings next week.
Baraka is regulated by the DFSA
Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing. Baraka is not a financial adviser and therefore does not provide financial advice. Our content is informational only.