As Netflix adds Microsoft to help build advertising model, has NFLX bottomed? Stranger things have happened


Share:
  • Netflix stock pops as it picks Microsoft to help build out its advertising model.
  • Microsoft stock drops slightly.
  • Disney also signs ad deal with The Trade Desk.

Netflix (NFLX) stock got some relief on Wednesday as it pushed ahead once news broke that it had partnered with Microsoft (MSFT) for its lower-cost advertising model. Netflix has been under pressure as the pandemic outperformance has been given back with the stock down nearly 70% so far this year. It has retraced significantly below its pre-pandemic level, which was around $370. Currently, it is trading at $176.

Microsoft fell slightly, but we do not think this was related to the Netflix news. This tie-up is less than significant to Microsoft (MSFT). Netflix reports earnings on July 19, while Microsoft reports earnings on July 27. We recently wrote another deep dive series article on Microsoft, giving it a 12-month price target of $230.

Microsoft Stock Deep Dive: Price target at $230 with near-term risks due to strong US dollar (fxstreet.com)

Why did Netflix stock pop?

Netflix needed some good news. While this is news, it is far from definitive, but it is also difficult to put a negative spin on this. The stock has been under massive pressure this year as subscribers and viewing times fall. The risk-reward to this strategy is probably skewed positively, and Netflix management would have been aware of that. Other streaming platforms have successfully used advertising models alongside paid subscription models for some time – think Spotify (SPOT). The only issue is the potential additional fees Netflix would need to pay to Hollywood studios to run advertising. The Wall Street Journal carried a story on this earlier in the week, saying Netflix may need to pay the studios up to 30% more to run their content on an advertising platform. 

The larger problem for Netflix is the loss of its dominance in the streaming market. This has read-across for other stocks and is a tenet of investing legends. Warren Buffet, for example, likes stocks with a built-in moat or a virtual monopoly with huge and costly barriers to entry. For the first ten years, Netflix had an open playing field in the streaming market with virtually no competition. Eventually, the big tech companies saw the potential and made some inroads via Amazon Prime and Apple TV.

Netflix had a major headstart though, and these were mere subsidiaries for Apple and Amazon. However, things began to get serious when Disney (DIS) entered the streaming market. It immediately undercut the price of Netflix and with its huge content slate began an aggressive customer growth phase. The pandemic helped both streaming companies and perhaps masked the growing competition Netflix was coming up against. Other streaming options from HBOMax, Paramount, NOWTV and others meant Netflix began to lose subscribers and its growth stalled.

In our view, this has been read across for Tesla (TSLA). Tesla more or less invented the EV market, and Netflix more or less invented the streaming market. Both had a massive head start and an open playing field, but both now face increasing competition from legacy companies: Netflix in the form of old school media and entertainment companies, Tesla from legacy automakers switching to EV mode.

See also: Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries (fxstreet.com)

Netflix stock forecast: Has Netflix found a bottom?

After a 70% fall, there is certainly some hope that the stock will eventually bottom out, but we feel earnings this week will put more pressure on the stock. The trend in subscriber growth remains negative, and it will take longer to arrest this decline in our view. However, the market has now likely priced in the bad news and the reaction to other earnings will be key.

Subscriber growth will probably be poor, but earnings should be more or less in line with current Wall Street forecasts. This should allow some temporary bottom to form with the potential for a short-term catalyst up to $240. Also of note, both the Relative Strength Index (RSI) and the Money Flow Index (MFI) have signaled oversold conditions recently, giving further credence to the short-term bottom. 

Netflix (NFLX) weekly

 

 

The author is short Tesla.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended content


Follow us on Telegram

Stay updated of all the news

Join Telegram

Recommended content

Editors’ Picks

EUR/USD holds steady below 1.0800 ahead of EU data

EUR/USD holds steady below 1.0800 ahead of EU data

EUR/USD is holding steady just shy of the 1.0800 mark in the early European morning. The US Dollar is consolidating the upside amid a cautious market tone, as investors assess Friday's US NFP blowout and hawkish Fed expectations. Eurozone data coming up next. 

EUR/USD News

GBP/USD defends gains near 1.2050 amid renewed Brexit optimism

GBP/USD defends gains near 1.2050 amid renewed Brexit optimism

GBP/USD is defending minor bids near 1.2050 in the European session. The Cable finds support from the renewed Brexit optimism, despite a broadly firmer US Dollar. EU said that they have reached a breakthrough on trade reported in NI protocol talks. 

GBP/USD News

Gold bulls need validation from $1,905

Gold bulls need validation from $1,905

Gold price rebounds from monthly low, grinding higher around intraday tops surrounding $1,878 heading into Monday’s European session. In doing so, the yellow metal snaps a two-day downtrend amid the sluggish US Dollar.

Gold News

Is this the beginning of the end for crypto bulls?

Is this the beginning of the end for crypto bulls?

Bitcoin is the glue that is holding this 2023 bull run intact for Ethereum, Ripple and other altcoins. But chinks in BTC bulls’ armor are beginning to show, therefore, investors need to be cautious of a sudden reversal. 

Read more

The Week Ahead - RBA rate meeting, UK Q4 GDP and earnings

The Week Ahead - RBA rate meeting, UK Q4 GDP and earnings

Back in November the RBA hiked rates by a less than expected 25bps, amidst concern about the effects recent rate hikes were having on the Australian economy and ergo the housing market. 

Read more

Forex MAJORS

Cryptocurrencies

Signatures