When it comes to subscription video on demand (SVOD) services, Netflix (NFLX +1.41%) is the biggest name in the business. With more than 230 million subscribers around the world, the streamer is unparalleled in terms of scale and reach. However, with some experts anticipating the company's viewership figures will decline this year, investors may wonder what the best position is for Netflix stock.
So let's break down the status of the company and its future prospects to see if we can determine how stakeholders might approach its shares.
A muted start in ads, but the landscape looks promising
After many years of saying advertising didn't make sense for the Netflix model, the company performed something of an about-face in November 2022 when it launched Basic with Ads. The $6.99 a month ad-supported video-on-demand (AVOD) service was pitched as a cheaper plan for those who don't mind a few commercials in the middle of their watch sessions.
According to initial reports, Netflix projected 40 million customers would be on the Basic with Ads plan by the end of 2023, but months on, it seems the company might struggle to reach that number. Shortly after launch, Netflix refunded marketers because it was not hitting its sign-up goals. And while Netflix has claimed it is happy with how the ad tier is performing, the streamer is yet to disclose user numbers, or to provide any future projections.
In spite of all this, it is worth noting that the ad-supported space has been growing, and many analysts anticipate it will only become bigger over the coming years. Insider Intelligence predicts that, by the end of 2023, over 50% of internet users in the U.S. will consume content via AVOD services. The company expects that figure will pass 55% in 2026.
NASDAQ: NFLX
Key Data Points
The account-sharing problem
Another key strategy for Netflix has been to monetize the 100 million viewers that the streamer claims are using other people's accounts to access its content. The company has introduced levies across multiple markets for so-called sub-accounts, charging customers an extra fee when it detects they are actively sharing their login details.
Netflix has acknowledged its approach to sub-accounts has resulted in cancellations but has expressed confidence that it is able to convert at least some lost viewers into paying subscribers.
Despite Netflix's implied confidence, the company recently paused a plan to introduce sub-account charges in the U.S. and some other high-saturation markets in the first quarter of fiscal 2023. Speaking about the decision during the company's Q1 earnings call, Netflix co-CEO Greg Peters noted the streamer had learned a lot from rolling out the fees in other markets, including how best to accommodate customers who want to sign in to their accounts while traveling.
"[W]e felt, based on those results, it was better to take a little bit of extra time, incorporate those learnings and make this transition as smooth as possible as we can for members," said Peters. "So we are going to launch this new improved version broadly, including in the United States in Q2."
No matter when Netflix introduces its sub-account crackdown in the U.S., it seems cancellation rates could be significant; a 2022 study by Aluma Insights projects 13% of U.S. Netflix customers would choose to end their subscription if asked to pay an additional $3 a month to share their login details with someone outside their home. And considering North American subscribers account for almost a third of Netflix's global customer base, such losses could well drag down the streamer's value.
Long-term prospects
Deciding what to do with Netflix stock in the current climate will surely depend on an investor's belief in the story the company is telling. Netflix's confidence in its AVOD offering seems to marry up with many analysts' long-term projections, but the streamer's suggestions that it will be able to entice lapsed viewers is not wholly supported by those watching Wall Street.
It is possible that Netflix's story over the coming years could be one where it loses some SVOD customers, only to make it up with lower-cost subscription fees and advertising revenue. But investors gaming out whether that picture makes sense for them will still need to consider their own tolerance for risk.
