KEY POINTS

  • The $18 billion Netflix spends on content is far too much
  • Advertising might be a lucrative source of income.
  • Customer satisfaction and subscription growth would improve if the company improved its recommendation system.

Netflix (NASDAQ:NFLX) is reeling after last week’s earnings report, but there are a few ways Netflix can rebound after its crash last week.

Netflix’s stock is down about 40% in a few days, and it’s down 70% from its peak last November. But then, the leading streaming service went up in flames when subscriptions unexpectedly plummeted, casting doubt on the idea that it may expand consistently as the streaming market grows.

Netflix’s value has plunged, but that isn’t surprising. It’s a mistake to write off one-time market darling Netflix just yet. Here are three reasons why Netflix can rebound after its crash.

1. Content overload

Netflix plans to invest $18 billion in content in 2022. That’s approximately equal to the budgets of the 60 most expensive films ever produced.

To be sure, Netflix makes more than movies, but $18 billion is a lot of money for material that lives almost entirely on Netflix rather than in movie theaters or cable networks. For years, the firm increased content spending to argue that more content would lead to subscription growth, but it appears to have hit its limit.

According to The Wall Street Journal, Netflix is now prioritizing return on investment rather than reach, and it plans to focus more on quality over quantity.

If a few hits are all it takes to attract subscribers, it’s easy to see why many of Netflix’s titles might go unseen. While Netflix has not said it will decrease its content spending, management did on the earnings call say that it would restrain spending at least until revenue grows again.

Improving the ROI of content should be a no-brainer for the firm since there appear to be many flops on the service, such as “He’s Expecting,” an anime about a man who gets pregnant and receives just a 1.1 rating on IMDB.

2. Advent of advertising

Netflix has long rejected commercial advertising because co-CEO Reed Hastings believes the company’s subscriber system is preferable. However, with subscriber growth slowing, the firm appears ready to adapt its course. “Allowing consumers who would like to have a lower price and are advertising-tolerant [to] get what they want makes a lot of sense,” said Hastings on the earnings call. “So that’s something we’re looking at now. We’re trying to figure out over the next year or two. But think of us as quite open to offering even lower prices with advertising as a consumer choice.”

Netflix’s higher-tier advertising offer makes sense. It would help Netflix combat the problem of password sharing, and the ad-tier model has previously shown to be effective. Hulu, for example, generates roughly the same amount of money through its advertising subscriptions as it does through ad-free subscriptions. So diversifying revenue streams makes sense, especially given that subscriber growth isn’t consistent anymore. In addition, advertisers will undoubtedly be excited to participate in Netflix, which has a unique reach of more than 200 million global subscribers and knows a lot about their viewing preferences.

Offering an ad tier may provide Netflix with another high-margin source of income.

3. Can I recommend something?

Another long-standing problem for Netflix has been its recommendation engine. When users sign in, they see a different collection of films and television shows presented to them, but Netflix isn’t always so successful at suggesting something good to watch. As a result, users frequently grumble that there is nothing worthwhile on the service. In addition, its menu has hundreds of options, allowing its massive library to get lost.

Management wrote to shareholders in a letter stating that they are focused on enhancing the “quality of programming and recommendations.” The firm also claimed it was adding a feature called “double thumbs up” to assist consumers in telling them what their favorite shows and movies are.

Upgrading the product

It’s been years since Netflix made a significant product upgrade, and it’s time for one. It’ll be tough to improve recommendations, but it’s worth the effort. The only two things that Netflix must accomplish to provide value are developing material that people want to watch and making it as simple as possible to locate it.

Because management thought it would take a year or two to put these changes in place and reaccelerate subscriber growth, a turnaround will not happen suddenly.

The good news is that the streaming stock costs less than 20 times trailing earnings. So if management delivers, in a few years, Netflix can rebound after its crash.

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