Competition in the streaming industry has increased significantly since 2019, lessening Netflix's (NFLX 1.75%) dominance in the market. As one of the industry's founders, the company held a vast majority of the U.S. market share for over a decade, responsible for 75% in March 2019. However, that figure has taken a deep dive in three years, with Netflix's majority market share at 26% in the U.S. in the second quarter of 2022.
Companies such as Disney, Apple, and Warner Bros. Discovery (WBD -1.01%) are threatening Netflix's spot at the top, evident by the company losing its first subscribers in a decade in Q1 2022. The loss led its stock to fall 62% year to date and has highlighted a red flag in its business: a lack of varied revenue streams. However, its brand has global recognition, which carries real power with consumers and could help it through the current slump.
Green flag: A robust media-streaming service
Netflix was founded in 1997, starting as a mail-based DVD business. After 10 years of building its rental company into a $1 billion business, Netflix took a leap and launched one of the world's first streaming platforms. After another decade, in 2017, annual revenue reached a record $11.6 billion. In that time, Netflix became a globally recognizable brand, offering its services in over 190 countries. In 2022, Netflix's trailing sales have climbed to $31 billion.
The company has the advantage of being first to the plate in most countries, with its streaming market share still above 50% in the U.K. and France in 2020 and at 45.4% in Japan in 2021. The figures are well above Netflix's U.S. market share of 30 to 37% in the U.S. from the end of 2020 to 2021. As the U.S. streaming market becomes increasingly saturated, international markets have become vital to thrive in the industry. For instance, Warner Bros. Discovery's HBO Max is available in 61 countries, with plans to expand to 190 by 2026. As a result, Netflix has four years to strengthen its claim in over 100 countries before Warner Bros. Discovery makes its move.
Moreover, in November, Netflix plans to introduce an ad-supported tier, which will offer consumers a cost-effective way to access its platform, opening it up to budget-conscious households and making it easier to stack with the unavoidable competing streaming services. Consequently, some analysts have asserted the ad-supported membership could generate $8.5 billion by 2025.
Red flag: Lack of diversification
There's no doubt that Netflix has a strong brand, which has grown its worth to nearly $100 billion. However, the lack of competition it enjoyed for years stunted its motivation to diversify its revenue. As a result, 100% of the company's revenue in 2021 came from streaming subscriptions categorized into four segments based on geographic location. In the fourth quarter of 2021, the U.S. and Canada were responsible for 43% of Netflix's revenue, while its second-biggest segment was Europe, the Middle East, and Africa at 33%.
A lack of varied revenue makes the company vulnerable to changes in the streaming market, such as increased competition or a decline in consumer demand. Both hit Netflix hard in 2022. Its coming ad-supported tier is a step in the right direction as it will bring in ad revenue, along with subscription revenue. That revenue will still be tied to streaming subscriptions, but the offering will strengthen its business.
Moreover, the company's service Netflix Games launched in November 2021 and has ventured into a new avenue of content. Netflix has made the push into gaming by offering about 25 mobile titles, with plans to double that number by the end of 2022, and announced the opening of its own development studio in Finland on Sept. 26. The Netflix Games library is currently free to all streaming subscribers, so it is not bringing in any extra revenue, but it has boosted the value of its subscription.
It's also important to remember that Netflix's streaming platform started as a free add-on to its DVD rental service, later becoming a separate subscription once it gained popularity. So there's no reason Netflix shouldn't be able to apply the same strategy with Netflix Games. However, as it stands, Netflix would do well to take notes from its competitors regarding revenue streams. In addition to streaming, Disney and Warner Bros. Discovery earn revenue from theme parks and games. Meanwhile, Amazon (AMZN -1.70%) has a booming cloud computing business and rock-solid e-commerce offerings.
Should you buy Netflix stock?
Netflix is a bargain, with its stock at one of its lowest prices in years. However, the business is currently in flux, with no guarantee that its coming ventures will pay off. Its ad-supported tier and gaming efforts are promising but are not yet established enough to rely on. This year has suggested that Netflix's streaming subscription revenue is not enough to sustain the company, but it's also too soon to tell if its diversification efforts will pay off.
Investors looking to add a streaming stock to their portfolio would be better off looking at Warner Bros. Discovery or Disney. Both companies have more varied businesses and are likely to offer significant gains long-term.
