3 Reasons Why Netflix Fears Are Overblown

By Markets Fool.com

Image source: Netflix.

Continue Reading Below

We could be eyeing a summer of dissed content atNetflix(NASDAQ: NFLX). Two third-party reports are suggesting that the loyalty of longtime subscribers is being challenged by the streaming platform's move to begin charging both new and old customers the same $9.99-a-month rate.

Subscribers who were paying $7.99 a month in early 2014 were told that they would be able to keep paying that rate for two years when the monthly price was bumped to $8.99 in May of that year. Tack on a boost to $9.99 a year later, as well as the shrill buzz of the grandfathering alarm clock going off after two years of the first price hike, and most of those longtime members started paying $9.99 a month this summer.

M Science turned heads first. Thebig data analytics and research specialist issued a report, forecasting that Netflix would experience flat net subscriber growth in the U.S. during the current quarter. Netlix's own outlook in late July was calling for 300,000 net domestic additions for the quarter ending next week.

Then we had Wall Street chime in. Jefferiesanalyst John Janedis issued a bearish analyst note on Friday, leaning on his firm's survey that asked 1,100 longtime subscribers how they felt about the service after being switched to current rates. Less than two-thirds of those surveyed are committed to sticking around, and even 16% of those who didn't cancel would do so if they were hit with another $1 increase in the next two years. He also concludes that Amazon's (NASDAQ: AMZN) Prime Video offering is gaining market share, a problematic trend at a time when Netflix seems vulnerable.

This is all pretty ominous stuff, but let's go over a couple of the reasons why this isn't as scary for Netflix as it may sound.

Continue Reading Below

1. The Amazon challenge is more of a friendly rivalry

There's no mutual exclusivity when it comes to enjoying streaming video services. You can stream Netflix without having to forgo Amazon's Prime Video. It's an easy call because Prime Video is included at no additional cost for Amazon Prime subscribers. However, the same can be said about Hulu, HBO Now, or any other video service. Combine a few services, and it's still cheaper than a cable or satellite television subscription, and most homes have one of those.

Netflix will continue to be the service of choice. No other platform has more than $12 billion in streaming content obligations. You can't get there without the scale that Netflix has achieved. Every tracker of digital consumption trends shows Netflix as the runaway leader of primetime bandwidth. Prime Video is great, but it's not a replacement.

2. Churn is an ongoing thing

Jeffries' survey may have shown that just 65% of the respondents were sold on sticking around, but just 7% of them had actually cancelled the service. Saying you're going to cancel or that you will nix Netflix if the rate goes up is one thing, but actually doing it is something else.

The 7% figure may still seem high, but there has always been turnover. Netflix stopped releasing its monthly churn at the end of 2011, but churn during the summer quarter that year clocked in at 6.3%. We're talking about more than 6% of the existing subscribers canceling the service in any given month -- or closer to 19% for the entire quarter -- and that was back when it had a lot fewer streaming and a lot more DVD-based subscribers.

Churn has been historically higher for the online service than the mail-based platform because it's so easy to stop and start up again. It's why Netflix decided that it was no longer a meaningful metric. A lot of people cancel Netflix every single day. Thankfully -- for now -- a lot more people are signing up in their places.

3. Bears will be bears

It's important to remember that Janedis was bearish long before he eyed the survey findings. He has an underperform rating and $76 price target on the stock. This should not discredit his opinion. In fact, Netflix shares are trading lower so far in 2016.

Netflix is coming off of a brutal quarter where it fell well short of its own subscriber guidance, and its outlook for the current quarter left a lot to be desired. The bears are winning at the moment. Netflix has to earn back your confidence. However, it would be more problematic to see a bull turning based on survey results -- and that's not the case here.

There will be a lot of reasons to be nervous when Netflix reports quarterly results again on Oct. 17. This will be a challenging quarter. However, the real test will be where Netflix goes following this one-time event where a 27-month window of holding rates for longtime subscribers came to an end. Netflix will be fine, even if it leaves this quarter hobbling.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.