Netflix needs 'a longer time-frame to reach peak penetration': BofA

·3 min read

It’s been a turbulent past couple of days, to say the least, for Netflix (NFLX), a stock which saw two consecutive trading days of declines after an underwhelming earnings report. Netflix’s Q4 earnings report estimated it would add an additional 2.5 million subscribers in Q1 2022, significantly lower than the 6.93 million expected.

A new Bank of America (BAC) report found that, in light of the Q4 earnings report, Netflix would likely require more time than previously expected in order to reach subscriber goals.

“We update our price objective to $605 from $750 based on our peak penetration valuation model,” the report explained. “We updated our peak penetration model as we see Netflix requiring a longer timeframe to reach peak penetration. We assume UCAN [United States and Canada] subscribers of 82 million in 5 years (vs. 80 million in 4 years prior) and international subscribers of 300 million in 14 years (vs. 380 million in 10 years prior).”

It’s been a troubling period for a company which was once the golden child of streaming services during the pandemic. NFLX reached its peak price in November 2021, several months after the release of the hit South Korean survival drama series Squid Games, which broke several streaming records and was valued at just south of a billion dollars for Netflix during that fall.

A man wearing a costume from the Netflix series 'Squid Game' participates in a mission at a department store in Bangkok, Thailand, November 20, 2021. REUTERS/Chalinee Thirasupa
A man wearing a costume from the Netflix series 'Squid Game' participates in a mission at a department store in Bangkok, Thailand, November 20, 2021. REUTERS/Chalinee Thirasupa

Netflix stock dropped by over 23% on Friday, after the earnings report was released, and dropped another 2% during trading hours Monday. Chief among the reasons for the bearish showing was the paltry subscriber growth estimate, which the company acknowledged was a result of competition affecting marginal growth in a post-earnings letter to shareholders.

Bank of America’s adjusted earnings projection for Netflix in Q1 2022, was $8,041 million, $382 million less than previous expectations. Adjusted earnings for subsequent years were even lower.

The report, authored by Research Analysts Nat Schindler, Justin Post, and Nicole Phang, identified “increasing content costs, new competitors in the company's streaming business, execution challenges and competition potentially limiting growth in new markets” as some of the most pressing downside risks to Netflix achieving the price target.

Meanwhile, competitors have been seizing the opportunity to pick up the slack in the streaming market. Disney+, first launched in 2019, has registered over 100 million subscribers worldwide in just two years while ViacomCBS and Comcast (CMCSA) have already developed their own respective services to rival Netflix.

It’s a difficult road ahead for the entertainment giant who just a few years ago was virtually the only player in the streaming space. Still, Netflix expressed optimism for the road ahead while acknowledging lower subscriber growth and rising competition. The Bank of America report designated NFLX a buy and noted that, despite concerns regarding competition and higher costs, the company’s international expansion into large markets like China should bode well for Netflix’s future growth.

“Consumers have always had many choices when it comes to their entertainment time - competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering,” Netflix said in a shareholder letter. “While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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