Netflix's (NFLX 3.17%) stock has been beaten down in 2022, suffering from a perfect storm of increased competition, rising inflation, and comparisons against 2021, when millions of home-bound consumers flocked to streaming platforms. As a result, the company's stock has plunged 53% since January.
The majority of its losses came on April 20, when its share price fell 37% in a single day after Netflix revealed a loss of 200,000 subscribers in the first quarter of 2022. The subscriber declines sent investors running for the hills, as they represented the first losses in a decade.
However, Netflix has responded by making swift changes to its business and restructuring its streaming strategy. The company's ability to quickly adapt to a changing market, along with an improved second quarter and a glowing third quarter, make Netflix stock an excellent buy. Here's why.
Responding to market changes
After suffering a tumultuous first quarter, Netflix announced the coming launch of an ad-supported tier and password crackdowns. The moves come as the streaming industry has vastly changed from what it was only a few years ago. The introduction of competing platforms such as Disney's Disney+, Warner Bros. Discovery's HBO Max, and Apple's Apple TV+ have made it increasingly difficult for Netflix to dominate a market it nearly monopolized only a short time ago. However, the company has been assertive in its attempt to adapt to the altered industry.
The company's move into ads comes after years of its CEOs rejecting the idea of introducing advertising on the platform. However, demand for ad-supported streaming services has soared in 2022. According to data from Comscore, American homes adopting ad-supported streaming services have outpaced streaming platforms without ads. This year, ad-supported streaming members grew 29% versus 21% for platforms without ads.
The company will launch its ad-supported membership on Nov. 1 in 12 countries, which Netflix has said "account for ~$149 billion of brand advertising spend across TV and streaming, or over 75% of the global market." The new plan will be 20% to 40% lower than its current pricing, which will likely be a welcome option for many consumers as the cost of living continues to rise.
Netflix's venture into ads and its plans to introduce password crackdowns in 2023 come as subscriber count becomes an increasingly insignificant metric and the average revenue per membership (ARM) becomes a more telling figure to estimate future performance. Developing an ad-supported tier and monetizing the views it receives from password sharing are steps to increase its ARM and boost revenue over time.
A glowing quarter for Netflix
On Oct. 18, Netflix posted Q3 2022 results that rallied investors who boosted its share price by 14.5% in 24 hours. The quarter saw the company add 2.41 million new subscribers on a forecast of 1 million, bringing its total to 223.09 million. Additionally, the streaming titan shared that it expects to add 4.5 million members in its fourth quarter.
However, it also announced that Q3 would be the last quarter for which it provides paid membership guidance, planning to release the figures exclusively in quarterly reports. The move was prompted by management's preference for focusing on revenue-centric figures such as ARM. Investors have long based Netflix's financial health on its subscriber count, but the company's shift away from the metric could provide its share price with more stability.
Moreover, Netflix expects to raise its ARM by 6% in its fourth quarter and to see a 9% year-over-year revenue boost. Co-CEO Reed Hastings called the company's fourth-quarter guidance "reasonable, not fantastic," citing foreign exchange factors as the main culprit. Hastings added, "Other than that, all the stars are lining up very well for us."
Since January, Netflix has refocused its business to prioritize growing its earnings and free cash flow over the long term. The move is a positive shift and will likely help it grow for years to come. With a sharp turnaround from the detrimental hits it suffered in Q1 2022 to a promising Q3 2022, Netflix looks to be on the path to continued growth.
Additionally, with its price-to-earnings ratio currently 57% below what it was a year ago, now might be the perfect time for an investment in Netflix stock.
