Investors were dismayed to discover that Netflix (NASDAQ:NFLX) Inc.’s stock continued to drop in price despite the fact that it had appeared inexpensive for months. Now, bulls believe that the video-streaming giant is on the verge of showing that it is an actual value stock, as opposed to a value trap. It is believed that the launch of a highly anticipated advertising-supported service this year and a crackdown on password sharing could reverse the company’s shocking subscriber losses and also provide a new revenue stream.
Director of research at Global X ETFs, Pedro Palandrani said, all of these factors could help put Netflix (NASDAQ:NFLX) back on a lasting multiyear growth trajectory and there is a strong likelihood that investors will reward that with a higher multiple.
Investors must endure a few more turbulent days: Even with the enormous success of the fourth season of the sci-fi thriller “Stranger Things,” the company, which has far more than 200 million subscribers, expects to have lost 2 million customers during the second quarter. The company will release its second-quarter results Tuesday after the market closes, and it has already stated that it expects to have lost about 2 million customers during the period.
The stock price already reflects a significant amount of negative news, but a better-than-expected quarter could spark a rally: This is Netflix’s lowest valuation since early 2013 and significantly below its 10-year average of 5.4 times. The Nasdaq 100 Index, in comparison, is valued at 3.6 times forward sales.
Netflix (NASDAQ:NFLX) plans to launch its ad-supported tier at the end of the year, after ignoring the concept for years. Netflix (NASDAQ:NFLX) mentioned that ads are coming and will be powered by Microsoft technology. The company stunned the industry by selecting Microsoft Corp. as its technology and sales partner for the ad-supported service last week. In recent months, it was rumored that Netflix (NASDAQ:NFLX) would add commercials to its streaming service and allow users to pay less if they are willing to watch them.
In recent weeks, it has confirmed its intention to implement the modification. Netflix (NASDAQ:NFLX) has never featured advertisements, unlike traditional TV services. However, the company’s strategy shifted as its revenue began to decline and its subscribers left. Since the announcement, the stock has increased by 9.4%.
Geetha Ranganathan, a Bloomberg Intelligence analyst, estimates that the company may be able to increase quarterly revenue in the United States and Canada by $750 million. She stated that overseas is the bigger opportunity and Netflix’s scale may make it a major global ad player. In the meantime, Palandrani estimates that the advertisements can generate between $500 million and $625 million in quarterly revenue, whereas Piper Sandler’s Tom Champion is more optimistic, estimating a quarterly revenue opportunity of approximately $1.4 billion.
Netflix’s share price has declined by 68% this year, the largest decline both in S&P 500 and Nasdaq 100 indices by wide margins, repeatedly deceiving optimists who believed a turnaround was imminent. The company faces intensifying competition, customers whose finances are being squeezed by rising inflation, the possibility of a global recession, and the end of the streaming boom fueled by a pandemic.
Rivals Walt Disney Co. (NYSE:DIS), Paramount Global (NASDAQ:PARA), and Warner Bros. Discovery Inc. (NASDAQ:WBD) have also been affected, losing at least a quarter of their market value in the last three months. However, newer entrants have priced their subscription fees significantly below Netflix’s in order to attract users, indicating that Netflix (NASDAQ:NFLX) could win some customers with a lower-priced, ad-supported service. Palandrani said that Disney+ (NYSE:DIS) is clear evidence of how effective subsidized plans can be in spurring growth. He added that Netflix (NASDAQ:NFLX) could end up doubling its total subscriber base in 2-3 years.
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