The stock market is near an all-time high, driven by a technology boom in artificial intelligence (AI). A prior leader of the technology boom — Netflix (NASDAQ: NFLX) — keeps slipping into one of its worst drawdowns ever.
Shares of Netflix are now down 54% from their highs, despite posting strong revenue growth and record profit margins in its recent quarterly earnings. So what is the problem for investors? Two words: eyeball share. Here’s why viewing time is a potential problem, and what Netflix plans to do about it.
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Earnings growth, watch hour stagnation
Looking at the headline financials, you could not find anything to complain about with Netflix’s Q3 earnings results. Revenue grew 12% year over year to $12.9 billion, operating margin was a record at 34.6%, and management repurchased $4.8 billion worth of stock in the quarter with excess cash flow. This is the recipe for strong stock returns over the long haul.
Watch hours tell a different story. Netflix did not report growth in viewing hours in the quarter, and viewing hours are reportedly stagnating in the United States and possibly in other countries. Above all else, time spent on Netflix will correlate with the value users get from the service, enabling future price increases.
According to third-party estimates, Netflix’s market share of TV viewing in the United States has not budged for the past two years or so, while YouTube’s is growing significantly. With streaming growing as a percentage of TV watch hours, Netflix is actually seeing a decline in market share strictly for streaming on TV in the United States, a worrying sign for the company that has dominated the sector since its inception.
Competing with YouTube and Instagram
To right the ship, Netflix has fired its head of content and head of film and is looking for different avenues to grow with its members. Of course, it wants to keep producing TV series and movies for people to watch, but the future may lie in other forms of video content.
These include investments in sports content, live events, podcasts/talk shows, and shorter series that have proven popular in international markets. It is competing heavily with Alphabet‘s YouTube, which has the advantage of an endless supply of niche content from around the globe, allowing it to gain significant market share even without a library of high-quality TV series and movies.
