Is the bubble starting to bust for Netflix and its share price, already down sharply from its highs this year?

Netflix share price under pressure

We could see the Netflix share price revisit lows seen at the end of last year, when it traded at $231.50, before peaking at $378 in May this year, if tonight’s latest numbers show further signs of slowing, following a disappointing update in July.  

As the online streaming market gets more crowded, the ability of streaming providers to stand out and provide value is likely to come under much greater scrutiny in the coming months. One of Netflix’s greatest strengths has been its ability to generate significant levels of content that customers are only too happy to pay a premium monthly subscription for.

This growth in users is important given the amount of money Netflix is spending in terms of new content. With over 150m subscribers, the current model relies on the growth of its subscriber base in order to continue this virtuous circle of acquire and spend.
 
When Netflix last reported in July, the shares dropped sharply after management reported a sudden slowdown in user growth across the board. In the US there was a loss of 126,000 subscribers against an expected gain of 352,000.

More worryingly international subscriber growth slowed to 2.83m new subscribers, which fell well short of expectations of 4.81m. While management said they expected this to bounce back in the current quarter to 7m with the return of popular shows like Stranger Things and The Crown, starting in November, investors seem less convinced with the shares down over 20% since those July peaks.

Netflix's competition set to intensify

With Disney and Apple set to launch cheaper packages as we head into year-end, Netflix management may have some hard choices to make when it comes to pricing, if there are clear signs of subscriber churn away from them, and towards the two new high profile kids on the block.

Quite simply the streaming market is becoming more and more crowded, and while for now Netflix can justify its premium price, due to its much greater content, the deep pockets of Apple and Disney could change that in the years ahead.

In short, Netflix shares could be vulnerable to further declines if subscriber growth slows further, or management revise their outlook down over the next 12 months. It won’t be so much the subscriber growth numbers that worry people, but the hit to margins if they are forced into a price war.

Consumers don’t have unlimited funds, and one or two subscriptions is usually enough for most people. Once you move above that something has to give, and while Netflix is still the market leader, it doesn’t have the deep pockets of Apple or Disney.

 


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