Key Points
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Concerns are growing around how engaged Netflix customers are.
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An analyst recently downgraded the stock due to concerning engagement trends.
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The streaming business is still doing well, however, generating double-digit growth in its most recent quarter.
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Netflix (NASDAQ:NFLX) has been a tremendous growth stock for years, but recently, investors have become worried about the path ahead for the streaming company. While it continues to grow, there appear to be warning signs that its service may be less compelling and enticing to consumers, and that there may be less loyalty, particularly as the streaming service has become more expensive in recent years.
The concerns appear to tie back to one specific issue: engagement.
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Is Netflix's content still compelling enough to keep consumers?
As more streaming services have come up, there's been significantly more competition for Netflix than there has been in the past. Initially, it was the go-to option for streaming because it had content from such a wide range of networks. But as companies have launched their own services, the battle of licensing has prompted Netflix to rely more heavily on making its own movies and TV shows. However, not everyone is convinced its strategy is working as well of late.
An analyst at Wells Fargo recently downgraded the stock due to engagement trends and the need for a big series to draw in consumers. Earlier this year, there was also a report that found some of the most popular shows on Netflix were losing over half of their audience after just the first season. At a time when consumers are battling higher prices, there's an incentive to switch between different streaming services rather than staying subscribed to multiple services at the same time.
Netflix has raised prices this year, with its cheapest plan, with ads, costing $8.99 per month, while its premium plan now costs $26.99 per month. The value proposition at Netflix is being tested, especially regarding how compelling and enticing the content is.
Is Netflix's stock in trouble?
Year to date, Netflix's stock has declined by 24%. Co-founder Reed Hastings has left the company, and the market appears worried about just how competitive the business may be moving forward.
I think it's still premature to be overly worried about Netflix's business. Its growth rate was still in double digits in its most recent quarterly report, and it does have plenty of opportunities to continue growing internationally. It's also done well with offering live sports.
The market may have overreacted when it comes to Netflix. With the stock trading at less than 19 times its estimated future earnings (based on analyst expectations), it could prove to be a steal of a deal right now.
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Wells Fargo is an advertising partner of Motley Fool Money. David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.