Netflix’s judgment day is approaching


Tthe good news is, Netflix (NASDAQ: NFLX) is still the undisputed king of streaming. The bad news is that its slowdown in growth may soon come to a complete stop.

This is the gist of a recent survey by Whip Media Group anyway, which found that the average American consumer was only planning to add one more on-demand service to their already heavy number of subscriptions to. streaming. Their main complaint? These services are getting expensive.

Image source: Getty Images.

This is not a death knell for Netflix. Indeed, Netflix remains the most popular video on demand platform in the world; it is also the one that is most likely to be kept if survey respondents could only keep one streaming service. However, this should be of concern to current owners of Netflix shares, as this stock has historically been priced at a premium based on growth that is no longer on the agenda.


It was a day that most investors knew it would come sooner or later. That is, at least in the United States, Netflix is ​​running out of homes to sell its services to. The rest of the world is not yet fully exploited, but as is the case in the United States, overseas video on demand streaming markets are also likely to be very crowded shortly.

The numbers from Whip Media speak volumes. Chief among those numbers is how the average American household currently subscribes to 4.7 streaming services, and there’s a good chance Netflix is ​​already one of them. The company reported 74 million paid memberships in the United States and Canada at the end of the second quarter of this year, about half of the total number of households in both countries. Tivo’s Q2 Video Trends Report confirms that over 80% of US and Canadian broadband and streaming consumers subscribe to Netflix, easily making it the most popular part of those SVOD subscriptions.

However, being the biggest and most popular supplier to a particular business is a double-edged sword when that business as a whole is about to hit a big wall like this. The aforementioned North American consumers? They also say they will only add one more streaming service to their lineup. This leaves little growth opportunity for new services like Walt disneyfrom Disney + and AT&Tby HBO Max. But, that leaves even fewer growth opportunities on the table for Netflix, which is likely already paid by most potential applicants. streaming market.

To that end, Netflix actually lost around 400,000 paying subscribers in North America during the second quarter of this year, after moderate growth each quarter from the third quarter of last year; things weren’t much better in other markets.

Netflix subscriber growth is slowing in all markets and declining in North America.

Data source: Netflix. Chart by author.

Enough already!

Of course, the surge of subscribers caused by the pandemic is certainly a difficult act to follow. It stands to reason, however, that the blocks have only accelerated the full conversion of all potential Netflix subscribers into full paid members.

Put simply, if someone in North America were to become a Netflix customer, they’ve probably already done so.

To reinforce this headwind – on top of the typical consumer plan to add only one additional streaming service to their current 4.7 services – is the fact that Netflix is ​​now facing a huge amount of new competition. HBO Max and Comcast‘s Peacock has only materialized since the middle of last year, joining Disney’s Hulu, a new and improved CBS All Access now called Paramount + from ViacomCBS, and Amazon Prime, which spent 40% more on original content in 2020 than in 2019. Even 70% of respondents to Whip Media’s survey said there are now too many SVOD services available. Lack of choice does not keep potential streaming customers on the sidelines.

None of these names will dethrone Netflix anytime soon on their own. Collectively, however, they are making waves for Netflix at a time when the company is grappling with the standalone problem of market saturation.

The Kicker: Whip’s survey also indicates that while subscribers are still very happy with Netflix, they are a bit happier with newcomer HBO Max. Forty-one percent of survey respondents chose Netflix as the service they would keep if they could only have one. Twenty-one percent, about half, said they would stick with HBO Max. But don’t forget that there are roughly twice as many Netflix members in North America as there are HBO Max subscribers. The two services are just as sticky once customers are on board, indicating that Netflix is ​​loosening its grip on the market.

It’s about valuation nowadays, not about growth

Once again, Netflix will survive. This will actually be great even if subscriber and revenue growth slows at a breakneck pace, as the same saturation dynamic evident in North America ends up taking shape in other parts of the world. At the very least, it’s profitable and can stay that way indefinitely.

The concern is more on the stock. This name has always been valued at rich valuations based on its rate of growth and market dominance.

It still is, in fact. Even after several quarters of weak membership and revenue growth, the market still supports a price / earnings ratio of around 60 and a near future of 45. Of course, those are high valuations that rely on supporting growth metrics. impressive. . But investors have never really had to value Netflix stocks in an environment as difficult as the one it is in now, nor the even more difficult one that awaits them.

At the end of the line ? Get ready for Netflix’s recent anemic growth to become the new normal. My analysis shows that the average consumer is about to be “maxed out” on streaming services – if they aren’t already.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. James brumley owns shares of AT&T. The Motley Fool owns shares and recommends Amazon, Netflix, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: January 2022 long calls at $ 1,920 on Amazon and January 2022 short calls at $ 1,940 on Amazon. The Motley Fool has a disclosure policy.

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