Stock Market Liquidation: Is Netflix a Buy?

Markets had a ugly year, and streaming stocks weren’t among the few categories to avoid the pain. For instance, disney (SAY -1.38%) and Discovery of Warner Bros. (WBD 0.68%) have seen their valuations fall by around 40% in 2022. netflix (NFLX 0.47%) has seen an even steeper drop in its stock price since the start of the year, but there are signs that the company remains a good long-term bet.

Netflix cracks down on account sharing

The first quarter of 2022 was a dark one for Netflix as its subscriber base began to dwindle. Management said it would start cracking down on users who share their account credentials with people outside their household, something investors have long wanted the company to do. Netflix hasn’t revealed how many subscribers share their logins, but a Leichtman Research Group study released earlier this year found that 33% of US Netflix accounts are used by multiple households.

Netflix has rolled out two pilot programs, both designed to charge users extra for the privilege of sharing their account details with others. The first test is underway in Chile, Costa Rica and Peru, where some customers are being asked to pay additional fees if the company detects that an account is being used in multiple locations. The second program monitors the Netflix app on smart TVs in Argentina, the Dominican Republic, El Salvador, Guatemala, and Honduras. This time the definition of a household was defined more strictly as a physical location. Again, if the company discovers that a connection is shared between two households, the account holder will be subject to additional charges.

Netflix has yet to discuss how these tests will go, or what monitoring tools and pricing structures it is leaning towards. But if reports from The New York Times and others are to believe, Netflix customers in the US who share accounts could start to see additional fees added to their monthly subscription payments before the end of the year.

From an investor perspective, Netflix’s decision to capture this additional revenue is a positive. There is, of course, a risk that these subscribers will resent being asked to pay more, especially after the company’s price hike last summer. But there’s also the possibility that a large portion of these customers will choose to stop sharing their accounts, which in turn could lead many former profiteers to open their own accounts.

An ad-supported tier is coming soon

The other part of Netflix’s plan to drive user growth is to introduce an ad-supported tier. The company recently revealed the cost of subscriptions to this new plan and set the launch date for November 3. Stakeholders have reason to be optimistic about its prospects.

Netflix has signed a partnership with Microsoft, which will provide the underlying ad technology for the new tier. Microsoft will also handle ad sales (perhaps a reflection of the streamer understanding that they are new to advertising). However, Netflix said the arrangement allows it the “flexibility to innovate,” suggesting it expects to not only learn from the partnership, but also iterate over time.

Netflix’s move into the ad-supported streaming space will not be without its challenges. There are already a plethora of established free ad services like Tubi and from Amazon (AMZN -2.75%) Freevee and Disney are launching an ad-supported Disney+ plan in December. But if Netflix delivers enough to consumers — and hits the right price — chances are its subscriber numbers will start heading in the right direction again.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Tom Wilton has had business dealings with Netflix but does not hold a position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Microsoft, Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: January 2024 Long Calls at $145 on Walt Disney and January 2024 Short Calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.

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