Video streaming giant Netflix (NASDAQ:) was one of the strongest stock performers during the pandemic. The company and its stock benefited from the stay-at-home environment, which fueled demand for its content.
The stock rose about 90% from the low it reached on March 16, 2020 to mid-October. But since then, it's been a downhill journey for equity. Shares are down more than 17% from last year's high. The first sign of COVID-19-related subscriber growth slowing came in April when the Los Gatos, California-based company reported its net new subscriber count was 2 million lower than its own forecast.
Even worse, Netflix predicted that it will add just 1 million subscribers in the second quarter, which ends this month. This sudden slowdown marks a return to normalcy for consumers as local economies reopen after a year of lockdowns and stay at home.
That is happening much earlier than expected in North America. In both the US and Canada, quarterly subscriber gains have fallen into the realm of hundreds of thousands upon millions. For the current period, Netflix expects the figure to be even flat.
In a situation where the economy is reopening and people are desperate for out-of-home experiences like traveling and dining out, programming on Netflix could be at the bottom of their to-do list. For Netflix, this change in its business environment comes as rivals spend billions of dollars trying to gain a foothold in the streaming world once dominated by NFLX.
Disney+ (NYSE:), for example, reached 100 million users in just 16 months after its launch in the US in November 2019. It was rolled out in Canada, Australia, Latin America and Singapore over the following months. . Netflix had 208 million subscribers at the end of the first quarter.
No more borrowing
Yet, when the battle in the post-pandemic world is for subscription subscribers cancel, then it is clear that Netflix remains well positioned to win this race. According to Netflix's quarterly letter to shareholders, the cancellation rate, or the number of subscribers who left the app, was lower than a year ago, even after the service increased the subscription price. One thing to keep in mind is that Netflix no longer relies on debt to fuel its growth. After years of borrowing to fund production, Netflix has said it no longer needs to raise outside funding to support its day-to-day operations. The company plans to reduce debt and will repurchase up to $5 billion in shares. According to research firm Jefferies, Netflix has solidified its position as the leader in streaming video and the stock price should recover strongly in the coming months. . In a recent note, the company said:
"We assume NFLX will be covered as the company turns the corner towards positive free cash flows and capital returns. Despite using popular third-party content to build its subscriber base and achieve economies of scale, NFLX is now able to self-fund an original content offering that rivals the entire TV/film industry combined.”
Jefferies has set $620 per share for the stock, which is 24% higher than where the stock closed on Friday. They also noted that the reopening was still a "near term overhang" for Netflix, but the entertainment company remains in a strong position going forward.
Bottom Line
Netflix's pandemic-era subscriber growth appears to have come to an end as the economy reopens and people resume normal activities. But the streaming company has emerged from the unique environment of the past year much stronger, cementing its position and market position.
The current weakness in its stocks presents a buying opportunity for long-term investors.
