Netflix stock too risky at $840?

Netflix the stock has had a solid year and is up nearly 72% in year-to-date trading. The company successfully navigated a brief post-Covid-19 subscriber drop. The stock is now trading at nearly $840 per share. stock led by the company’s solid execution on two fronts, namely its crackdown on password sharing and the expansion of its ad-supported streaming option. This is compared to rival Disneywhich has increased by just 5% in the same period. But with stocks trading at all-time highs, is it too risky? See our Netflix Downside Scenario Netflix Stock Downside Scenario: $400

Netflix stock has experienced significant volatility in the past. The return on the stock was 11% in 2021, -51% in 2022 and 65% in 2023. In contrast, Trefis was High quality portfoliowith a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, HQ Portfolio stocks outperformed the benchmark index with less risk; less of a roller coaster ride as it turns out HQ Portfolio performance metrics.

Much of Netflix’s growth in recent quarters has come via strong subscriber growth, with the company adding over 50 million subscribers between early January 2023 and September 2024, bringing its user base to around 283 million. Netflix began placing restrictions on password sharing last year, requiring people who used someone else’s account to create their own accounts or sign up for paid account sharing ($8 per month for add-on subscribers) to continue to use Netflix. Although this crackdown on account sharing increased subscriber numbers, the impact may be short-lived. With the policy now enforced in over 100 countries, there may be limited growth potential from this path.

The same concern may also apply to Netflix’s ad-supported plans. According to Netflix, more than half of new subscribers in countries that offer its ad-subsidized plans choose the ad tier, but this initial increase could slow future growth. We wouldn’t be surprised if paid sharing and ad-supported plans pulled potential subscribers from past years, dampening future growth. Netflix’s paid net additions have slowed recently. Paid adds in the US and Canada stood at 0.69 million in Q3 2024, down from 2.5 million in Q1 and around 1.5 million in Q2. Netflix’s decision to stop reporting subscriber numbers from 2025 could also be an indicator that the company sees slower subscriber growth going forward.

Netflix’s ARPU growth may also slow going forward. Netflix has already raised prices several times in recent years, with its most popular ad-free plan rising from $10 in 2017 to $15.50 today. While Netflix has adeptly monetized users without increasing churn driven by its strong content slate and recently added advertising revenue streams, competition is increasing. For example, Disney’s streaming packages, which offer Disney Plus, Hulu and ESPN Plus for as low as $15 a month, appear to offer greater value. Of course, the streaming market is not a zero-sum game with many users subscribing to multiple services, but increasing financial pressures may lead to more cancellations or subscribers jumping between services by month.

More niche streaming services are also seeing a lot of traction, with services focused on more tailored programming such as British TV, feel-good movies and anime, as the major streaming services cater to a much wider audience. The increasingly competitive environment, along with a challenging economic outlook and pressure on consumers, leaves Netflix with less room to raise prices going forward. Netflix has also refrained from raising the price of its standard full-HD plan since the last increase in January 2022, suggesting a relatively cautious approach to pricing.

Netflix’s margin growth may also cool. While net margins have also grown over the past few years, growing from 9% in 2019 to around 22% in 2023, rising content costs, including its push into live sports programming such as NFL games and WWE wrestling, could start to erode those gains. Content spending, which fell temporarily during the 2023 writer and actor strikes, is also expected to rise again in 2024, when Netflix plans to spend about $17 billion on content. If growth slows and costs rise, net margins could contract, potentially pushing Netflix’s profit growth into a lower gear. While Netflix may see cool margins, electric cars and renewables, Tesla may see better times, given Elon Musk’s friendship with President Trump. Here is How Telsa is taking advantage of Trump.

At the current share price of nearly $840 per share, Netflix is ​​trading at around 42x expected 2024 earnings, which seems expensive in our view. By comparison, the stock was trading at around 20x earnings back in mid-2022. While Netflix’s recent performance has been strong, markets tend to be short-termist, extrapolating short-term successes into the long term. In Netflix’s case, the assumption is likely that the company will continue its strong streak of subscriber additions and likely grow revenue comfortably in the double digits. However, there is a real possibility that Netflix will soon see subscriber growth cool as the dual benefit of password sharing and ad-supported tiers are likely to stabilize. In the event of such a scenario, Netflix stock could face a steep decline from its current highs, making it a potentially risky investment. We value Netflix shares at around $613 per share. share, about 25% below the market price. See our analysis of Netflix rating: Expensive or cheap?

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