It’s been a rough few months for Netflix (NASDAQ:NFLX) shares. A year ago, they were trading around $500. Last Friday, they closed at $190, a 62% drop. There have been a few reasons for the large decline over this period. As an investor, I want to consider whether the US-based company will be able to recover in coming years to see if an investment makes sense right now.
Recent problems
One reason for the drop is the shift in consumer behaviour as we come out of the pandemic. When I look at the chart of Netflix shares over the past few years, I can see a jump at the start of 2020 when lockdowns began. Naturally, with us all forced to stay at home, we spent more time in front of screens. Streaming services like Netflix did very well out of this, growing memberships during this period.
However, we’re leaving this period behind, and Netflix is starting to feel this pinch in recent results. For example, Q1 2022 results showed that global paid streaming memberships dropped by 200k. The forecast for Q2 also highlights another likely drop of a higher amount.
Aside from this, another concern that is weighing on the shares is increased competition. I’ve seen far more activity recently from rivals such as Disney+, as well as the continued presence of Amazon Prime Video and others.
This will make it harder for Netflix to grow in this space for the future, impacting future earnings.
Future direction for Netflix shares
In the growth outlook section of the recent results, the business commented that “while hundreds of millions of homes pay for Netflix, well over half of the world’s broadband homes don’t yet, representing huge future growth potential.”
This big picture view is one that I agree with, but one that I don’t think Netflix shares have caught onto yet. It’s no surprise to me that the shares have fallen so far in recent months. The market can be very short-sighted sometimes, focusing on just the next quarter. I accept that Netflix growth will slow in coming months and that it’ll have a tough 2022.
Yet overall, I think the long-term (five years) trajectory is higher from current levels. Streaming has still not reached a huge amount of households around the world. Further, there’s a huge amount of account sharing that goes on (something the business acknowledges). By tightening up on this, millions more unique accounts could be added.
I also think the shares could do well in the long run due to a more permanent shift in consumer behaviour. Granted, people are going to be outdoors more and inside less. But at the same time, I think people many now prefer to watch a film from the comfort of their home rather than go to a cinema. So I think the customer base will grow overall. It’ll lose some to other streaming services, but overall the target market should increase.
On that basis, I’m considering buying Netflix shares below $200 for long-term upside. In five years’ time, I expect the share price to considerably higher than current levels.
