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Sparking one of the more remarkable comebacks in recent memory, content streaming service Netflix (NFLX) in the first half of 2022 appeared to be on life support. In October of the prior year, the weekly average price of NFLX stock got very close to hitting $700. By late January, this metric dropped to below $400 and by early May, it fell to below $200.
Fortunately, management refused to give up, making important adjustments to the new business realities. Among the more controversial changes involved Netflix’s about-face regarding password sharing. Previously, management appeared to encourage the practice. With a new policy in place, users of the streaming service can still share their access with those outside their household. It’s just that now, they must pay an additional $8 per month.
The decision, which was telegraphed by Netflix a year ago, sought to “…end a practice that the company allowed to go unchecked for years while its streaming service was attracting subscribers in droves,” wrote the Associated Press. “At that time, management had little incentive to risk riling customers by reining in password sharing.”
However, during a period of shifting trends within the consumer economy, management could no longer ignore the potential expansion of its total addressable market. As the AP stated, while Netflix looked the other way, approximately 100 million people worldwide received access to the company’s flagship content via passwords acquired from family and friends. Still, a year of ho-hum subscriber growth forced Netflix to lay down the law.
So far, the results appear to affirm Netflix’s tough call.
NFLX Stock Pops as Consumers Open Their Wallets
While it’s always a risk to upset the target consumer demographic with a more draconian policy shift, in Netflix’s case, the product is apparently too compelling to walk away from. Indeed, the opposite circumstance materialized: more people signed up for subscriptions.
According to data provider Antenna, when Netflix alerted its members in late May of the password policy change, the streaming giant enjoyed its four largest days of U.S. customer signups since Antenna began tracking the platform. During the aforementioned timespan, Netflix accrued nearly 100,000 daily signups on two of the days.
Last Friday, NFLX stock closed up 2.6% against the prior session. Additionally, it represented one of the highlights on Barchart’s screener for unusual stock options volume.
Specifically, total volume reached 525,059 contracts against an open interest reading of 1.095 million. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 84.18%. Call volume hit 359,624 contracts against put volume of 165,435. This pairing yielded a put/call ratio of 0.46, on paper favoring the bulls.
So far this year, NFLX stock gained over 42% of equity value. Of course, other events – such as better-than-expected subscriber growth in prior quarters – bolstered sentiment. However, the password crackdown will likely help augment Netflix’s attempt to gain as much market share as possible in a troubled economy. Not only that, the troubles themselves could boost NFLX stock.
Economic Woes Incentivizes Cheap Entertainment
During the worst of the COVID-19 pandemic, NFLX stock benefitted as the underlying platform offered one of the few viable entertainment options available. However, as COVID restrictions faded, the concept of revenge travel – or the collective desire to get out of the house and take those long-delayed vacations – took over. At that juncture, few people wanted to sit at home and binge watch TV programs.
However, as consumer finances get strained due to myriad headwinds – including stubbornly high inflation and mass layoffs – the need for cheap entertainment as a psychological respite rose. Further, evidence that the consumer may be lowering their expenditures due to economic pressures may have come from Casey’s General Stores (CASY).
Last week, the convenience store and gasoline station posted disappointing results for its fiscal fourth quarter earnings report, missing on both the top and bottom lines. Sadly, the miss was particularly glaring because in the months covering Casey’s fiscal Q4 2023 – February through April – the national average gasoline price sat at $3.471 per gallon. In the year-ago period, the average price was $3.949.
Therefore, even with a 12.1% lower gas price, demand from Casey’s customers could not lead to either an earnings or growth target hit. Fundamentally, it’s possible that more folks may be choosing to stay home as we enter the summer travel season, which just might bode well for NFLX stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
