Insights

Is It Time to Buy Netflix?

Netflix (NASDAQ: NFLX) is having one heck of a year but not in a good way. Shares have cratered 66% in 2022 and are down over 70% from last year’s all-time high.
In April, the company reported a disappointing quarter, including its first drop in subscribers in more than a decade. What’s more, management signaled that subscribers would decline by another two million in the current quarter. And to cap it all off, Netflix said up to 100 million people access the company’s content free of charge through unauthorized password sharing.

Source: Statista
In a better stock market environment, Netflix’s woes may have been overlooked by investors. However, this year, that’s not happening. As a result, management has been forced to take a hard look at its business and make some changes.
So is the company doing what it takes to turn things around? Is now the time to buy? Let’s look at what Netflix is doing to right the ship.
Image source: Getty Images.

When the competition heats up, it’s time to tighten the belt 
Netflix CEO Reed Hastings famously quipped in 2017 that Netflix’s direct competition wasn’t another company — it was sleep. And while that might have been true at the time, it’s no longer the case.
Today, there are dozens of streaming options. Some are run by deep-pocketed corporate giants like Disney, Apple, and Amazon. Last year, Disney alone spent more on content than Netflix — shelling out $25 billion versus Netflix’s $17 billion.
And while those bigger competitors are able to subsidize their production costs on the back of other, more profitable divisions, Netflix doesn’t have that luxury. It can’t rely on theme park revenue, iPhone sales, or high-margin web services to fund niche films and TV shows.
What’s encouraging is that Netflix management seems to understand this, and they’re acting on it. The company has cut 2% of its workforce, canceled several projects that were in development, and it appears to be pursuing a more pragmatic approach.
The Hollywood Reporter summarizes the new approach as “bigger, better, and fewer.” The era of expensive showpiece projects at Netflix, such as 2019’s $175 million The Irishman, appears to be over. Discipline is now the watchword, and that’s a good thing for investors.
Despite the negativity, Netflix’s fundamentals look fine 
When it comes to Netflix, perception might not equal reality. That’s because the company is currently in flux. Since it went public, Netflix has been a growth stock. Its revenues and earnings have been powered by years of subscriber growth — which now appears to be peaking.
Yet, that actually might not be the case, because the company has a plan to jump-start growth in two ways:
Create a new ad-supported tier to draw in viewers and grow revenue.
Crackdown on the more than 100 million viewers who are using shared passwords.
While neither of these solutions is a panacea for Netflix’s subscriber problems, I’m growing more confident management is on the right path. 

Data by YCharts.
Setting aside concerns over subscriber figures, Netflix’s operating margins had already jumped above 20% in 2021, and even after April’s ugly quarter, operating margins for the trailing 12 months are 20.4% — almost twice that of a competitor like Paramount.
The true test for Netflix will come in the second half of this year. When it reports earnings in mid-July, prospective investors (like me) will need to see the company has made some progress toward restarting its growth engine and streamlining its existing operations. If it can do that, Netflix might be a turnaround story worth investing in.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Amazon and Walt Disney. The Motley Fool has positions in and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy. –

Netflix (NASDAQ: NFLX) is having one heck of a year but not in a good way. Shares have cratered 66% in 2022 and are down over 70% from last year’s all-time high.

In April, the company reported a disappointing quarter, including its first drop in subscribers in more than a decade. What’s more, management signaled that subscribers would decline by another two million in the current quarter. And to cap it all off, Netflix said up to 100 million people access the company’s content free of charge through unauthorized password sharing.

Source: Statista

In a better stock market environment, Netflix’s woes may have been overlooked by investors. However, this year, that’s not happening. As a result, management has been forced to take a hard look at its business and make some changes.

So is the company doing what it takes to turn things around? Is now the time to buy? Let’s look at what Netflix is doing to right the ship.

Image source: Getty Images.

When the competition heats up, it’s time to tighten the belt 

Netflix CEO Reed Hastings famously quipped in 2017 that Netflix’s direct competition wasn’t another company — it was sleep. And while that might have been true at the time, it’s no longer the case.

Today, there are dozens of streaming options. Some are run by deep-pocketed corporate giants like DisneyApple, and Amazon. Last year, Disney alone spent more on content than Netflix — shelling out $25 billion versus Netflix’s $17 billion.

And while those bigger competitors are able to subsidize their production costs on the back of other, more profitable divisions, Netflix doesn’t have that luxury. It can’t rely on theme park revenue, iPhone sales, or high-margin web services to fund niche films and TV shows.

What’s encouraging is that Netflix management seems to understand this, and they’re acting on it. The company has cut 2% of its workforce, canceled several projects that were in development, and it appears to be pursuing a more pragmatic approach.

The Hollywood Reporter summarizes the new approach as “bigger, better, and fewer.” The era of expensive showpiece projects at Netflix, such as 2019’s $175 million The Irishman, appears to be over. Discipline is now the watchword, and that’s a good thing for investors.

Despite the negativity, Netflix’s fundamentals look fine 

When it comes to Netflix, perception might not equal reality. That’s because the company is currently in flux. Since it went public, Netflix has been a growth stock. Its revenues and earnings have been powered by years of subscriber growth — which now appears to be peaking.

Yet, that actually might not be the case, because the company has a plan to jump-start growth in two ways:

Create a new ad-supported tier to draw in viewers and grow revenue.
Crackdown on the more than 100 million viewers who are using shared passwords.

While neither of these solutions is a panacea for Netflix’s subscriber problems, I’m growing more confident management is on the right path. 

Data by YCharts.

Setting aside concerns over subscriber figures, Netflix’s operating margins had already jumped above 20% in 2021, and even after April’s ugly quarter, operating margins for the trailing 12 months are 20.4% — almost twice that of a competitor like Paramount.

The true test for Netflix will come in the second half of this year. When it reports earnings in mid-July, prospective investors (like me) will need to see the company has made some progress toward restarting its growth engine and streamlining its existing operations. If it can do that, Netflix might be a turnaround story worth investing in.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Amazon and Walt Disney. The Motley Fool has positions in and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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