Streaming giant Netflix (NFLX -0.43%) has been seeing red over the past year. The company's shares are down 58% in the trailing-12-month period due to multiple headwinds (more on these below). However, Netflix stock has had a strong showing in the past three months with shares rising over 41% in this period.
Can Netflix keep these gains and perhaps even extend them in the coming months? It's hard to say, but there are good reasons to be optimistic about the company's near-term future. Let's consider two reasons why Netflix's stock may have bottomed out.
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1. Netflix could start getting new subs again
One of the main reasons Netflix has been under pressure lately is the company's lackluster user growth numbers. The streaming pioneer has been losing subscribers, and when coupled with the increasingly competitive landscape of the streaming industry, that does not bode well for its future. Netflix ended the second quarter with 220.67 million paid subscribers, a decrease of 970,000 compared to the previous quarter.
However, Netflix expects to return to subscriber growth during the third quarter. Management is guiding for one million net new subs for the period. Although that would be a decrease compared to the 4.4 million new subs it added during the prior-year period, it would still be a reversal of recent trends.
Keep in mind the company's viewership soared during the early days of the outbreak. What we are witnessing in terms of lower (and sometimes negative) user growth is an adjustment period, given the inflated numbers we saw earlier in the pandemic. At any rate, Netflix's user growth has been disrupted by pandemic-related headwinds.
2. Netflix's new sources of revenue
Netflix's troubles related to heavy competition and password sharing have caused management to consider new opportunities. First, the company is planning to introduce a subscription option that features advertisements. This option would be cheaper than its current plans, between $7 and $9 according to some reports, potentially attracting price-sensitive consumers who can pick and choose from more streaming services than ever.
Second, Netflix estimates more than 100 million households have access to its platform thanks to password sharing. In other words, millions of viewers are enjoying Netflix free of charge. The tech giant's ad-supported tier may help it convert some of these viewers into paying subscribers, but it's also testing additional fees for password-sharing households in select markets.
According to preliminary reports, Netflix itself estimates its ad-supported plan -- which should go live by early November -- could attract some 40 million subscribers by the third quarter of 2023.
In addition to new subs, the company will generate revenue from the ads on its platform too. Oppenheimer analyst Jason Helfstein expects Netflix to rack up $4.6 billion in ad revenue by 2025. That would represent just 15% of the company's trailing-12-month revenue, but coupled with new subscriptions, the ad-supported tier could work wonders for Netflix.
These developments could help the company extend its recent stock market gains.
Don't focus too much on the near term
It's always hard to predict the near-term swings of the stock market. Netflix stock could drop once again if it falls short of its subscriber guidance in the third quarter. Also, the economic landscape remains tricky with high inflation, among other issues. These marketwide problems have impacted ad spending, leading to lower revenue for companies that rely on ads to generate much of their sales, including Roku, another streaming giant.
That's why investors shouldn't make too much of Netflix's run in the past three months. Instead, it's best to focus on the company's long-term prospects, which remain strong. Netflix's new ad-supported tier should help with user growth. The company's engagement continues to rise as streaming grabs even more of people's viewing time. In August, streaming accounted for 35.0% of television viewing time in the U.S., compared to cable's 34.5%.
Note that streaming exceeded cable in this category for the first time in July. And in August, Netflix alone was responsible for 7.6% of viewing time in a tie at the lead with Alphabet's YouTube. There remains plenty of room for growth in the worldwide streaming industry as it has yet to reach the same level of penetration in many countries as it has in the U.S.
Netflix's solid name recognition (it has achieved the rare feat of becoming a verb), shrewd content strategy, and increased engagement will help it deliver solid long-term returns from here on out.
