Netflix Stock: When to Expect a Comeback?

Netflix is in the news today after Wells Fargo slashed the stock’s price target and gave a bearish outlook, citing rising deactivations following controversial TV series Cuties.

Rising Churn Rate

Wells Fargo analyst Steve Cahall said in a report that typically, the churn rate for Netflix is at 3.5%-4%, which is very impressive and healthy. But this churn rate, or subscriber deactivations, will increase by at least five times in a single week due to the controversy over Cuties, according to estimates by Wells Fargo. This equals to a monthly churn rate of 4.7%, or 28 million deactivations, in the third quarter alone.

The report also said that Netflix could report negative additions in the third quarter given its net additions are less than 28 million. The firm also cut its EPS forecast for the third quarter to $2.12 from $2.14. For full-year 2020, Wells Fargo slashed Netflix’s EPS estimate to $6.13 from $6.17.

Subscription Fee Hike?

But some analysts believe that the recent controversy is temporary and Netflix could rally and rise in the near future. Jefferies analyst Alex Giaimo recently said in a report that Netflix could increase its subscription fees in the near future, which would increase the company’s revenue with a minimum churn rate. The analyst said that Netflix could generate up to $1 billion in fiscal 2021, based on a $1 to $2 increase in either North America or Europe. The analyst also increased its price target for Netflix to $570 from $550 and reiterated an Overweight rating.

Competition

The competition in the streaming space is extremely strong. Disney+ clocked over 60 million subscribers globally since its launch in November. Netflix is also facing a tough competition from HBO, Apple TV, Comcast and Amazon. However, so far all these competitors have failed to develop deep libraries of content like Netflix.

But data suggests that Netflix is remains the leader in the industry. According to data released by Reelgood, an aggregator of streaming services, 86% and 93% of subscribers of famous streaming websites like HBO Max and Amazon Prime Video also subscribe to Netflix, but just 65% of Netflix subscribers signed up for Netflix competitors.

Netflix subscriptions are also rising globally if we ignore the current rising churn rate amid the controversy. The company’s worldwide subscriptions increased by 23% year over year to 192.95 million in the first half, as people remain at home and prefer to watch content online.