Netflix (NFLX -9.09%) remains one of the most recognizable names in the streaming industry, but the competitive landscape it now faces has changed dramatically in the past three years. New streaming services keep popping up like weeds to the point where there is some evidence of subscription fatigue, where consumers are overwhelmed with the sheer number of options available.
Meanwhile, Netflix has had to deal with various other headwinds, such as password sharing. Netflix has undoubtedly been an excellent moneymaker for longtime shareholders, but is the company's stock still worth buying under these less-than-ideal conditions? Let's find out.
Netflix's financial results should improve
Netflix has adapted to the demands of the evolving streaming industry in ways that should benefit its financial results over the long run. The company's newer initiatives include introducing a cheaper ($6.99/month) subscription option that supports ads. This would have been considered heretical for Netflix's management just a few years ago, so this is an important departure from the company's historical position.
Netflix is also introducing paid sharing, where primary account holders must pay for sub-accounts used by people outside their households. Neither of these new rollouts is perfect. Netflix's ad-supported tier comes at a time when the advertising industry is in shambles, with businesses having decreased their advertising budget over the past year. According to the U.S. Federal Reserve, there could be a recession on the way, so this problem could persist.
Also, some of Netflix's account holders could cancel their subscriptions if they have to pay for sub-accounts. According to the research company Aluma Insights, 13% of Netflix's subscribers in the U.S. plan to cancel their accounts due to having to pay for sharing their passwords. Even though they won't be perfect, Netflix's new initiatives should yield positive results. The company once estimated that more than 100 million households are accessing its platform for free.
After testing paid sharing in several countries, Netflix decided to delay the launch of paid sharing in the U.S. to the second quarter; it was initially supposed to be introduced in the first. Management said it was pleased with the release of this solution for password sharing in these other regions and said it found ways to improve the experience of its subscribers. The company will probably seek to limit the backlash from U.S. members. And while the ad market isn't doing great right now, it should rebound eventually once economic pressures ease.
The combination of those factors should lead to improved financial results for Netflix down the line.
The industry is still in growth mode
Netflix's revenue is still growing, albeit much slower than it used to several years ago. In the first quarter, the company's top line jumped by just 3.7% year over year to $8.2 billion. Here's how that compares to the sales growth rates it delivered in the past 10 years.
NFLX Revenue (Quarterly YOY Growth) data by YCharts.
Of course, Netflix is now a more mature company than it was near the early days of this period. It's unlikely that the streaming specialist will return to the spectacular revenue growth it was able to show for much of the 2010s. Still, Netflix should improve on that front as its new sources of revenue kick in, especially since there is still considerable room to grow in the streaming industry.
In its first quarter letter to shareholders, Netflix shared some data again highlighting this point. In its most penetrated markets -- the U.S. and the U.K. -- Netflix still accounted for just 7% and 9% of television viewing time in March, respectively. And in these regions, streaming grabbed just 34% and 35% of total viewing time. Linear television is still being phased out, but it isn't even close to being completely gone, even in developed and mature places like the U.S., never mind other regions where streaming is less penetrated.
That's a key reason Netflix's prospects remain attractive, as it can continue making headway and increasing its share of viewing time for a long time, while still growing its revenue and earnings. So even after a history of market-beating returns, Netflix isn't done just yet. That's why investors can safely buy and hold the company's shares.
