Netflix (NFLX 0.79%) stock is down about 70% from a year ago, resulting in nervous investors concerned for the company's future. While the numbers seem to suggest it's time to cut losses and jump ship, here's why it's a good idea to be patient while Netflix makes changes and essentially rebrands its business.
A change in form
In Q1 2022, Netflix reported a loss of 200,000 subscribers and a projection to lose a further 2 million in Q2 2022. The report shook perceptions of the streaming giant that previously saw the company as a model for success within the industry.
Since the day Netflix lost $54 billion within 24 hours after its stock price plummeted more than 35%, the company has gone through significant changes. After years of rejecting the introduction of ads on its platform, Netflix announced an ad-supported tier earlier this year. In another diversion from its business style, the company also revealed plans to crack down on password sharing.
Ads have long been considered a hindrance to consumers, with quality services and ads often seen as mutually exclusive. However, the COVID-19 pandemic, recent geopolitical events, and heightened inflation have forced people to tighten discretionary spending. As entertainment has become less of a priority in many consumers' budgets, demand for ad-supported services has risen.
Additionally, a recent study found that more than 60% of consumers prefer ad-supported streaming with either no fee or a reduced fee. The ad-supported tier has the potential to open up an entirely new market for Netflix: people who previously found the service too expensive and are willing to watch ads for a reduced fee. Ads allow the company to offer its services for a lower price without losses and the potential for gains depending on the streamer's ad structure.
It is positive that Netflix is tuned in to shifts in consumer needs and willing to change its own business model, even when that entails going against its previous beliefs. While cracking down on password sharing is less consumer-friendly, Netflix has tested the method in other countries where it has charged $2.99 or less a month to add up to two people on one account. The price is significantly less than a full membership, allowing the company to increase profits from those already using the service.
New ventures
Along with changes to its business model, Netflix has also made the most significant addition to its service since the introduction of its streaming platform -- starting out as a mail-in DVD service. The company announced its venture into games with Netflix Games in November 2021, offering a library of mobile games to all subscribers at no extra cost.
It is still early days for Netflix Games, but it has acquired three game developers in the months since its announcement, including the studios Boss Fight Entertainment, Night School, and Next Games. The company has also partnered with established indie game developer Devolver Digital to bring three new and exclusive titles to Netflix subscribers. Additionally, the streaming giant has plans to grow its current gaming library of 23 titles to 50 by the end of the year.
Netflix's venture into games aims to increase the value of its membership and encourage subscriber retention. Research has shown that 96% of millennials and those part of Generation Z play games an average of 11 to 13 hours a week, while 89% of Generation X play an average of 10 hours a week. With such a large portion of the population devoting their time to gaming, it stands to reason that enticing additions to Netflix Games could convince subscribers that their membership is worth keeping.
What's next?
Netflix looks very different from what it was just over a year ago, and with the rate of its changes, chances are its business will be even less recognizable another year from now. The company plans to release its ad-supported tier by the end of 2022, has yet to implement its password-sharing measures in the U.S., and is continuously updating its gaming service. Netflix has had to quickly adjust and evolve with the massively altered streaming market, carving out a new identity within the industry.
The positive takeaway is that Netflix has been more than willing to change, suffering the downfall of profits and subscribers as it refreshes its business. It's wise to be patient with the stock until after the company has gone through its planned changes and its future success is more certain. For now, Netflix just needs time to come into itself as it adjusts to the reformed streaming market.