Netflix (NFLX 1.74%) can't seem to catch a break lately. The stock price for the streaming leader has nosedived about 66% year to date and some of the price drop can be attributed to another underwhelming earnings report (this one released in April). From a top- and bottom-line standpoint, the company performed just fine. Total sales ended at $7.9 billion, in line with Wall Street estimates, and its $3.53 diluted earnings per share topped analyst estimates by more than 20%.
It was the streaming platform's updated subscriber count that rattled investors. Global paid memberships in Q1 grew a lackluster 6.7% year over year, falling short of analysts' expectations. The company also experienced an unusual quarter-over-quarter loss of 200,000 subscribers. And management warned investors that it expects an additional 2 million subscribers to leave the platform in Q2.
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It appears that the once-undisputed streaming king finds itself at a crossroads. The company's pace of growth isn't what it used to be, prompting a wave of investors to exit their positions in the stock. It certainly hasn't helped that broader macroeconomic headwinds like high inflation, rising interest rates, and the Russo-Ukrainian War continue to weigh down the stock market, specifically the technology sector. With many investors now falling out of love with Netflix, some wonder if now might be the optimal time to buy stock in the video streamer. They are just looking for some good reasons to invest.
With that in mind, here are three ways Netflix can improve growth moving forward and re-invigorate investor sentiment.
1. It's time to crack down on account sharing
Apart from its 222 million paying subscribers, management estimates that Netflix accounts are being shared with more than 100 million additional households worldwide. This isn't a fresh problem -- the company has been dealing with account sharing for years. However, now that growth is unwinding, it's a higher-priority issue.
So how can the streaming platform look to monetize sharing? In its latest earnings call, management made it very clear that it's not trying to shut down account sharing in its entirety. Instead, the company intends to ask current members to pay more for allowing other households to access their subscriptions. Currently, the company is experimenting with new policies in Costa Rica, Chile, and Peru, but it has been reported that the initial stages have gotten off to a rocky start.
I'm not surprised to hear this news, though -- Netflix will likely face criticism and confusion from subscribers in the early phases of the crackdown. But while curbing account sharing won't be a simple task, successful execution would certainly boost the company's growth in the future.
2. It's time to introduce an ad-supported service tier
Let's face it: Nobody likes when advertisements interrupt television time. That said, some consumers that have dropped Netflix might be willing to return if they can pay a lower monthly price. One way to do that is to offer a service tier that is supported by advertising. During Netflix's first-quarter earnings call, Reed Hastings, Netflix's co-CEO, noted that the company plans to explore low-end plans for advertising-tolerant customers.
Adding an advertising layer could be a huge success for Netflix. Not only would it offer consumers a choice to pay a cheaper monthly subscription, but it would also allow the company to leverage its massive membership base. Boasting 222 million global paid members, the streaming platform could attract as a fantastic hub for advertisers. With recent chatter that the company may introduce an ad-supported subscription by the end of 2022, the video streaming leader could uncover another source of revenue to help foster future growth.
3. Netflix needs to continue improving, diversifying content
As the video streaming industry becomes increasingly crowded, content quality will differentiate the haves from the have-nots. Netflix is firmly positioned in this regard -- the company is well funded and has done extraordinarily well improving its in-house content over the past few years. In 2021, the streaming platform won the most Emmy Awards of any TV network and boasted six out of the 10 most-searched TV shows worldwide. Its film studio also earned 27 Oscar nominations this year, the most of any studio.
Netflix spent $17 billion on content in fiscal year 2021, and the company plans to continue its hefty investments into story development and service upgrades moving forward. In Q1, it spent $4.3 billion on content, representing more than 50% of total sales.
When reflecting on Netflix's journey to becoming a video streaming powerhouse, it's evident that the company has made monumental steps in strengthening its original TV shows and films. As a result, Netflix has truly evolved into a global entertainment platform, a designation it will look to maintain via strong content creation moving forward.
