Here’s Why Netflix Stock May Be Riskier Than You Think

netflix (NASDAQ:NFLX) still stands above all other streaming networks, with 220 million subscribers and $8 billion in revenue. However, it continues to take a beating from the many other streaming companies trying to topple it and grab market share.

While it tackles these issues from atop its precarious perch, it has one major downside compared to nearly all of its competitors – and that makes owning Netflix stock a bit risky right now.

A Whole New Streaming Landscape

Let’s take a few steps back to see what led to this situation since Netflix has not changed, but the world has changed. disney had Disney+ in the plans before the pandemic, and it first launched in the US in November 2019, just before COVID-19.

The unforeseen circumstances that followed had a massive effect on the streaming industry. Disney+ has been adopted at a dramatically accelerated rate, Netflix itself has seen unusually high subscriber growth, and several other studios have jumped on the bandwagon with their own streaming services to grab a slice of the pie.

The result is that there is now a flooded market, with many services that are not differentiated (except for the titles they offer). It also means that Netflix may have some issues. Not only has its subscriber growth plummeted, but subscriber counts actually plummeted in the first and second quarters of 2022.

Netflix still has a long way to go, maintaining the highest number of subscribers so far. It continues to roll out popular original content that is attracting new subscribers in certain regions, and it has remained profitable, as well as positive cash flow.

However, as competitors progress and subscriber numbers decline, Netflix has had to change its model to stay competitive. It recently added gaming services to its platform, and it is building a free ad-supported version similar to Roku to generate revenue and retain more viewers.

However, something else is missing that could be a key ingredient of a winning model.

What other streamers have in common – and Netflix doesn’t

Leaving Roku aside, the other major streaming channels are Disney+, HBO Max, Peacock, Paramount+, Amazon Prime, Apple TV+ and Discovery+. That’s a lot of competition for the same dollars. Out of all these, the only one besides Netflix that doesn’t have a theatrical production studio is Apple. Disney owns several studios, including Marvel and Pixar, in addition to the Disney label. HBO Max and Discovery+ both belong to the new Discovery of Warner Bros.. Peacock belongs to Comcastowner of Universal Studios, Paramount+ is owned by Primordial (NASDAQ: PARA)and Amazon recently acquired MGM Studios.

At various times, Netflix has entered into agreements with many of these companies to deliver their content on its platform. However, many studios have pulled their content from Netflix to stream on their own channels. With few exceptions, much of Netflix’s content at this point comes from its own studios. The advantage of this system is that Netflix can send its content directly to streaming, which is a good thing for subscribers. It also creates fresher content instead of recycled content from other studios.

However, it also becomes very expensive. And that’s where Netflix’s competitors have an advantage. The studio-owned streaming sites – all of which are above except Netflix, Roku and Apple – generate billions of dollars in box office revenue. This goes a long way to covering production expenses before streaming content, and this operational model gives them more resources to cover directly streaming content as well.

If Netflix wants to be able to compete with these studios, it needs the resources to produce content on par with the big studios. Before the pandemic, it was going in this direction. But with all the streaming companies pouring money into new content to capture market share, Netflix has also increased its spending on content, without benefiting from ticket sales to cover the costs.

I first noted this as a plus for Disney, but new management at Warner Bros. Discovery is also poised to make the most of the model. He recently said he’ll be focusing on sending more feature films to theaters before streaming, and he’s also considering the idea of ​​launching an ad-supported tier.

Without the ability to send movies to theaters, Netflix will have a much harder time recouping the costs of high-caliber movies. And if it wants to stay competitive, it needs high-caliber content.

What are Netflix options?

So far, Netflix is ​​taking the other approach – moving towards the ad-supported model to attract more viewers and make money in other ways, a model similar to Roku. Roku’s ad business is strong enough that it was able to roll out its own original content last year. They were a big hit with viewers, and Netflix could succeed that way, with an ad-supported level as well.

Does it make sense that Netflix releases its films in theaters? That’s another avenue he could explore. He’s done this in a limited way in the past, and according to Bloomberg, he’s in talks with CMA (NYSE: AMC) and Cinemark Holdings (NYSE: CNK) about a trial for some of its next releases.

The only network we haven’t talked about is Apple, which is unique because it’s a streaming-only studio attached to another company. Nor is it about relying on a huge library to capture viewers. So while it may lose tons of money on the service, it’s negligible on Apple’s total business.

Where does all this leave the best streaming provider? I would say Netflix is ​​in a risky spot right now as it struggles to regain its footing, and investors should keep that in mind.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Jennifer Saibil holds positions at Walt Disney. The Motley Fool holds positions and recommends Amazon, Apple, Netflix, Roku and Walt Disney. The Motley Fool recommends Comcast and Warner Bros. Discovery, Inc. and recommends the following options: January 2024 Long Calls at $145 on Walt Disney, March 2023 Long Calls at $120 on Apple, January 2024 Short Calls at $155 on Walt Disney, and March 2023 Short Calls at $130 appeals to Apple. The Motley Fool has a disclosure policy.

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