Stock Market Sell-Off: Is Netflix a Buy?

The markets have had an ugly year, and streaming stocks have not been among the few categories to avoid the pain. For example, Disney (DIS -1.16%) and Warner Bros. Discovery (WBD 0.44%) have seen their valuations drop by roughly 40% in 2022. Netflix (NFLX 0.83%) has experienced an even deeper decline in its stock price since the beginning of the year, but there are some signs that the company remains a good long-term bet.

Netflix is cracking down on account sharing

The first quarter of 2022 was dismal for Netflix, as its subscriber base started to shrink. Management said it would start cracking down on users who share their account logins with people outside of their household — something investors had long wanted the company to do. Netflix has not disclosed how many subscribers are sharing their logins, but a study by Leichtman Research Group published earlier this year indicated that 33% of U.S. Netflix accounts are used by multiple households.

Netflix has rolled out two pilot schemes, both designed to charge users extra for the privilege of sharing their account details with others. The first test is operating in Chile, Costa Rica, and Peru, where some customers are asked to pay an extra fee if the company detects an account being used in more than one location. The second program monitors the Netflix app on smart TVs across 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 finds a login is being shared across two households, the account holder will be subject to an additional charge.

Netflix has yet to discuss how those tests are going, or what monitoring tools and fee structures it is leaning toward. But if sourced reports from The New York Times and others are to be believed, Netflix customers in the U.S. who share accounts could start to see extra charges added to their monthly subscription payments before the year is out.

From the perspective of investors, Netflix’s move to capture this extra income is a positive factor. There is, of course, a risk that those subscribers may be irked at being asked to pay more — particularly after the company’s price hike this past summer. But there’s also the prospect that a large fraction of those customers will opt to stop sharing their accounts, which could in turn lead many of the former freeloaders to sign up for their own accounts.

An ad-supported tier is coming soon

The other part of Netflix’s plan to stimulate user growth is to introduce an ad-supported tier. The company recently revealed what subscriptions to this new plan will cost and pinned down the launch date to November 3. There are reasons for stakeholders to feel positive 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 the ad sales (perhaps a reflection of the fact that the streamer understands it’s a novice in the advertising arena). However, Netflix has said the arrangement allows it the “flexibility to innovate,” suggesting that it not only expects to learn from the partnership, but also to 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-to-watch ad-based services like Tubi and Amazon’s (AMZN -2.57%) Freevee, and Disney is launching an ad-supported Disney+ plan in December. But if Netflix offers enough to consumers — and hits the right price point — there’s every chance its subscriber numbers will start heading in the right direction again.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Tom Wilton has had business dealings with Netflix but holds no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Netflix, and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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