Netflix partners with Microsoft: is this a buy signal? -MavenFlix

Shares of netflix (NFLX) – Get the Netflix Inc. have been in freefall for several quarters. Even after a -68% cumulative return in 2022, several Wall Street analysts still list the stock as a “sell.” One of the main reasons for Netflix’s recent difficulties? Competition in the industry from huge players such as Amazon and Disney.

However, recent news has made some Netflix investors happy: the company has decided to partner with Microsoft. Is allying with another Big Tech company a good strategy for Netflix? The market seems to think so. On the day the partnership was announced, NFLX was up 1.11%. But let’s understand the mechanics of this deal and how Netflix intends to use it to leverage its own profits.

Figure 1: Netflix partners with Microsoft: is this a buy signal?

(Learn more about the MavenFlix: Netflix Stock: What to Expect Ahead of Q2 Results

A “dynamic duo”

This week, Netflix announced that it has partnered with Microsoft to develop a platform based on ad revenue. This ad-based concept had already been launched during the company’s last earnings calls, but this plan makes things much more concrete.

The idea is that the new ad-based subscription product will be cheaper for the end consumer. The loss of direct revenue from subscribers will in turn be compensated by advertisements. Now Microsoft is scrambling to figure out how it will insert ads into the Netflix ecosystem while maintaining a premium experience for subscribers and providing an attractive product for potential advertisers.

(Learn more about the MavenFlix: 5 Factors to Consider Before Buying Netflix Stock)

To move back

The development of this new subscription model has been heavily influenced by Netflix’s recent subscriber declines. These declines have embittered many analysts – and many investors in general – on NFLX.

Figure 2: Netflix's streak ends after a decade of unwavering growth.

Figure 2: Netflix’s streak comes to an end after a decade of unwavering growth.

After seeing the first drop in its overall subscriber count in more than 10 years, Netflix decided to offer a cheaper service to better compete with rivals. Much of the churn seen in the company’s last quarter has to do with its subscription prices.

For years, one of Netflix’s biggest competitive advantages has been its enormous pricing power. When there was less competition in the market, Netflix could pass on its cost increases to customers in the form of subscription fee increases.

Since disney (SAY) – Get The Walt Disney Company Report, Amazon (AMZN) – Get the report from Inc., HBO, and other big players have entered the space, however, Netflix’s pricing power has dropped significantly. The ability of consumers to switch to other cheaper services remains a significant threat to Netflix’s bottom line. In the last quarter alone, the company saw a drop of 600,000 subscribers in the United States and Canada.

And now?

Analysts expect Netflix’s new pricing modality to positively attract new subscribers and even recoup some of those who had left the ecosystem due to high subscription costs. However, the company’s margin is expected to suffer and future earnings forecasts leave much to be desired. Moreover, if this partnership works, it is highly likely that other players will also adopt this strategy, destroying Netflix’s competitive advantage once again.

We think Netflix is ​​an innovative company, but we also think the streaming industry has become both very competitive and very uncertain. This makes any “obvious” call to invest in NFLX very difficult.

(Disclaimer: This is not investment advice. The author may have one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not influence the editorial content. Thank you for supporting MavenFlix)

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