It’s been a bumpy year for streaming giant Netflix (NASDAQ:) as investors questioned whether or not the firm can continue to deliver the kind of growth they’ve become accustomed to. NFLX stock has fallen more than 20% since the beginning of July due to poor second quarter results and competition on the horizon. However, now could be a great time to buy the dip — if you believe this is only short-term weakness, this is an excellent entry point for Netflix stock.
NFLX Stock Sinks After Q2 Miss
It can’t be ignored that NFLX failed to deliver in the second quarter. The firm’s results showed that the number international subscribers rose by 2.8 million, but U.S. subscriber figures were 126,000 lower. Those figures were worrying for a few reasons. First — they came in significantly below expectations. Analysts were expecting to see international subscriptions rise by 4.8 million and domestic subscriptions rise by 352,000. That’s a staggering miss, and it’s unlike Netflix stock to come in so far below predictions.
The second reason those figures were such a problem for investors to digest was the fact that . In the U.S., 64.2% of the total membership fees is being spent on marketing and sales activities. Internationally that percentage is much higher at 86%. That means that international growth isn’t actually helping Netflix’s bottom line much — so growth abroad isn’t exactly offsetting losses in the U.S.
The other reason NFLX stock is down in the dumps right now is the threat of powerful incoming competition to the streaming space. Netflix has been able to fend off competition from the likes of Amazon (NASDAQ:) for years, but things are about to get tougher as several deep-pocketed rivals are due to enter the streaming space over the next few months.
Disney (NYSE:) is the biggest concern for investors at the moment as the media conglomerate not only has a huge arsenal of popular content behind it, but the firm has years of experience and a ton of cash at its disposal as it rolls out its Disney+ streaming service. Disney also owns a majority of Hulu and will be packaging its services together.
Apple (NASDAQ:) is another worrisome competitor set to debut a streaming service before the year is out, and AT&T’s (NYSE:T) control of HBO has created another fearsome opponent.
The timing of Netflix’s earnings miss couldn’t be worse with a slew of rival services set to debut over the next few months.
Potential Upside for NFLX
I’ll admit the subscriber losses are troubling and couldn’t have come at a worse time for NFLX stock. However, I think it’s worth taking a step back and considering the possibility that the huge pullback in Netflix stock could be an overreaction. For one thing, for Netflix, and some of the weakness can be explained by seasonality and a lack of new content releases.
As far as competition goes, most agree that there is room for a few streaming services in the industry as the majority of people subscribe to more than one. Right now, it’s unclear exactly how many can co-exist and what people will be willing to pay for their memberships. Netflix currently relies on its membership fees rather than advertising dollars, but that could change if the firm finds that price increases are causing an exodus of users.
Content is King
Netflix has become known for its library of quality content — most of which has been produced by the firm itself. Ultimately, though price will certainly factor into which streaming services people sign up for, content is what will drive their decisions and keep them tied into one service over another.
Netflix has a slight edge here because the firm already has a great deal of data from its users about what works and how to create content they’re engaged with. That’s certainly worth something as we gear up for a streaming showdown.
The Bottom Line for Netflix Stock
There’s no hiding the fact that NFLX stock’s Q2 was bad. A drop in U.S. subscribers is terrible no matter how you slice it, but the question here is whether or not this is an indication of a larger problem.
Netflix’s third-quarter results will make or break a Netflix stock comeback. , Q3 appears to be off to a strong start. July data showed that searches for “Netflix” are on the rise and the firm’s mobile app downloads are also higher, suggesting that the firm could make a comeback.
If you already own NFLX stock, I certainly wouldn’t rush out to sell as I believe the firm’s strong position in the streaming space makes it a good long-term bet. However, be prepared for some turbulence as new rivals make traders jittery.
NFLX results are likely to be highly scrutinized over the next few quarters as investors try to suss out whether the competition is affecting Netflix’s growth potential. There’s also the potential for a sizable upward bounce in the coming months if Q3 proves naysayers wrong and the firm delivers a rebound in subscriber numbers.
As of this writing, Laura Hoy was long NFLX, AMZN and T.
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