When the pandemic began, the majority of the population was forced to work from home. The pandemic didn’t only affect our work schedule, but how we entertain ourselves. More and more activities were done from the safety of our home. Many companies benefitted from this change of lifestyle. They experienced huge growth due to an increase in demand. However, the problem with subscription-based revenue is a limit in demand. So what’s happened to subscription stocks?
What Are Subscription Stocks?
To grow the business, more subscribers have to join, but there isn’t an infinite amount. This model works when we are stuck at home, but doesn’t when we are free to return to our usual lifestyles.
The number of subscribers will eventually grow slower or reach a plateau and begin to drop. We will take a look at companies that have been experiencing impressive but unsustainable growth in the past years.
It may be due to the pandemic or to other causes. We will also examine where they are now and how they can continue growing by diversifying their products.
Facebook/Meta (NASDAQ: FB)
Since becoming one of the very first social media platforms, Facebook has seen tremendous growth. It isn’t a subscription model per se since everything is free, but the company lives off its users’ activity across all platforms.
It became almost inconceivable not to have an account. The platform allows childhood friends, coworkers and family members to connect and share their life.
It captured the interest of a young audience thanks to photo and video sharing. The platform also facilitated free messaging and calls across international borders with no charges.
It has been criticized to steal and share its clients’ personal information to third parties for advertising use. Which if you did [ay, would hurt subscription stocks in general.
Subscription Stocks Current Revenues
Facebook’s revenues are very easy to separate. In fact, 97% of revenues come from the ads they sell on their platforms. However, privacy concerns make targeted ads harder to implement.
In Q4 of 2021, Facebook lost users for the first time in its existence. It wasn’t a significant loss, less than 1M, but investors took it very seriously. The stock dropped over 40% since this announcement.
It seems the company saw it coming. Earlier this year, Facebook invested $10B into its Metaverse business segment. To emphasize the transition, it also changed its name to Meta Platforms.
Here comes the remaining 3% of its revenues, its Reality Labs segment. It is its augmented and virtual reality segment (AR & VR).
What is the potential in the Reality Labs segment? It represents less than $1B in revenues and amounted to over $3B in operating losses. However, it did grow by 22% from Q4 2020. The potential remains huge for Meta Labs.
Thanks to its acquisition of Oculus in 2014, many new products will soon be available to everyone. From smart glasses to AR and VR sets, the future looks bright for the company. Many users are seeking new ways to discover inaccessible new things from the comfort of their homes.
It may take some time to fully transition to a completely virtual social media world. Meetings, video games and travel can all be experienced virtually for those who desire.
Let’s not forget the advertisement segment. It can be implemented much easier in a virtual reality. The stock might take a while to bounce back, but with the release of new and exciting technologies, it’s unavoidable for subscription stocks.
Subscription Stocks: Netflix (NASDAQ: NFLX)
Netflix is at the top of the streaming services. If it wasn’t for subscribers, there wouldn’t be a company.
For the first time in almost a decade, Netflix lost subscribers and the growth is expected to drastically slow down.
The company is projected to lose 2M more by this summer. Investors are already deciding to abort the ship. YTD the stock price is down over 70%.
What was the company’s response? Let’s increase prices, eliminate password sharing and maybe put some ads. What was the public’s response? What about no.
It would be justified with better image quality under the ‘’Basic Plan’’. HD is only available for Standard users and Ultra HD for Premium members. Hopefully Netflix will listen to it’s subscribers and not disappear from subscription stocks altogether.
Unfortunately, Netflix doesn’t have other revenue streams per se. The company is slowly expanding its international presence with shows and movies created in foreign countries.
It is successful, but not enough to guarantee steady growth. At the risk of losing customers, the company can start using ads on its platform. It might generate more profits than losses.
In March 2022, Netflix bought Finnish mobile game developer Next Games. Allowing its users to participate in online games on its platform can be a step in the right direction. Netflix users could join with an invite code and play from home or on the same screen in the same room.
Games can be part of a separate subscription or a one-time payment. Just giving you ideas, Netflix. You have the platform, use it wisely.
Lastly, new streaming services are appearing. Amazon Prime, Apple TV, Disney and more are competing for a share of the market. Each of them is releasing original content as well as existing shows and movies.
Maybe one of them should invent a way to watch simultaneously two shows on separate platforms! In any case, I think Netflix’s stock will have a harder time rebounding and maintaining its growth.
Shopify (NYSE: SHOP)
Perhaps Shopify’s recent slump is for the best. It was way over-valued for what it was worth. Shopify is an e-commerce platform that also allows its users to create an online shop and sell products.
It isn’t the only e-commerce giant to fall short of its quarterly expectations. Etsy, eBay and Amazon were also affected. However, Shopify has been much more affected than its peers.
YTD the stock is down over 70% while revenues were growing. Many saw this coming earlier this year. Pandemic-level sales couldn’t last once life returned to normal. What will Shopify do to reverse the trend?
Well, on May 5th, Shopify announced its acquisition of Deliverr. The company adds 1 million more shipments per month for Shopify. It also provides shipping services for Amazon, eBay, Walmart and other e-commerce platforms. This move secures competitive delivery times and a piece of its competitors’ business.
Shopify Future Growth
How does the future look for Shopify? Despite the recent price action, Shopify is well-positioned to keep growing. It will most likely be at a slower pace. In 2020, Shopify saw 85% growth in its business, which is unlikely to repeat. Consumers are returning to brick and mortar shops and the pandemic restrictions seem to be dying off.
Fortunately, the e-commerce sector will keep growing. Delivery points are reaching remote places with much more ease and more people are moving to urban areas. Shopify has a great platform that will keep attracting more buyers and independent sellers. Look out for a rebound for this stock.
Subscription Stocks: Amazon (NASDAQ: AMZN)
Although Amazon operates in a similar space as Shopify, its issues are different. The company’s growth also took a hit.
The most surprising number comes from its Q1 2022 earnings report. EPS fell drastically short of the expected number.
It came at -7.56. Revenue for the quarter fell short as well. Like many other companies, Amazon blames inflation, the war in Ukraine and blah blah blah. However, the company has other problems to deal with.
First, Amazon built too many warehouses around the world. These come at a cost. Employees aren’t cheap and they can’t work like robots. This brings the second point: labor unions.
There has been a lot of pressure to unionize due to very poor labor standards set by Amazon. Lastly, the same issue as for Shopify. E-commerce growth couldn’t maintain its pandemic levels.
As for its Amazon Prime subscription service, it is seeing steady growth despite an increase in prices. Many users are complaining about the price hike, but unlike Netflix, Amazon is creating unmatched standards for its shipping and streaming services.
Thankfully for the company, it has a diverse revenue stream and is invested in many future growth opportunities.
Amazon Future Growth
First, Amazon Web Services (AWS) is seeing a lot of growth YoY. The cloud service is onboarding major companies such as Meta, Goldman Sachs, Pfizer and more. Its revenues are growing in North America and globally. This is one of Amazon’s most promising segments.
Second, Amazon is catching up to Google and Facebook in the advertisement revenue segment. The company has a big user dataset across all its platforms. The forecast is supposed to double between 2020 and the end of 2023.
Lastly, Amazon has an 18% stake in Rivian (NASDAQ: RIVN). However, since its public debut in November 2021, Rivian shares lost almost 80% of their value. Amazon is betting on them to supply thousands of electric delivery trucks and vehicles.
So far, this investment is affecting its books and it is reflected in the last earnings report. There is still hope left with this segment.
It’s important to remember that Amazon isn’t only an e-commerce platform. It has many other revenue streams that make it a must-own stock for the future. The company also has a lot of influence and lobby power. It is not to be underestimated.
Other Subscription Stocks
There are a plethora of other subscription stocks that have been affected over the last few years. The main reasons for this in an increase in competition and loosening COVID restrictions.
Many platforms are diversifying their products or acquiring complementary companies. This is the case for many crypto platforms. Coinbase (NASDAQ: COIN) has been heavily hit due to a lot of competition and a decreasing price of many coins (BTC, Luna, ETH, Doge etc.). Users are looking for more competitive prices and access to more coins and digital assets.
Other companies like Peloton (NASDAQ: PTON) saw many consumers switch to home workouts when gyms were closed. Now that it is possible to work out outside, with our gym buddies and in groups, users aren’t as active on the platform and growth is slowing.
Many other companies such as NordicTrack and Echelon are reproducing Peloton’s successful online workout competition model.
Competition is good for companies and consumers. The latter has a wider variety of products to choose from. On the other hand, companies have to keep innovating and competing with others to release a different and better products.
Subscription Stocks Final Take
To conclude, subscription stocks benefitted from consumers that were stuck at home to realize unsustainable growth. Many investors and analysts saw it coming and got out early.
Most of these stocks have seen substantial losses in their stock prices. However, growth might be slowing but it is still there in most industries. Recently, most major markets have seen periods of volatility.
If supply chain issues, inflation and the war in Ukraine can be contained, there are positive times ahead. In the next weeks, trade carefully. The summer holidays are here and some traders may want to take a break from a very frustrating year in the stock market.
If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.