Insights

Is Netflix a Buy?

It’s been a horrible six months for Netflix (NASDAQ: NFLX). Its share price has crashed an astounding 70% from its all-time high of $691.69 per share on Nov. 17, 2021. Adding to the misery, the company announced an unexpected dip in subscribers during its most recent quarter.
So, is this a buying opportunity, or should investors steer clear of Netflix? Let’s dive in.

Image source: Getty Images.

Why Netflix has been in free fall
Netflix shares have tumbled for two main reasons: 

Growth stocks, in general, have fallen out of favor.
Netflix subscriber growth appears to have peaked.

The first concern goes far beyond Netflix. Investors have soured on high-multiple growth stocks with inflation high and the Federal Reserve tightening interest rates. 
However, the second problem is company-specific — and not easily solved. The market for on-demand video streaming is now ultra-competitive. The number of streaming services seems almost endless, with some of the biggest corporate names battling it out for their share of monthly subscriber fees. Walt Disney, Apple, Amazon, Paramount, Comcast, and Warner Bros. Discovery have all jumped into the streaming wars, creating competitive headwinds for Netflix that didn’t exist a few years ago. As a result, Netflix lost subscribers for the first time in a decade, signaling that — perhaps — its subscriber base has finally peaked.

Is this a buying opportunity?
Somewhat lost in the mayhem of Netflix’s post-earnings slide was the news that the company is considering an ad-supported model. This announcement departs from the company’s long-held view that its content should be ad-free.
Moreover, the company expects to lose 2 million subscribers in the second quarter, reinforcing the argument that Netflix does not have pricing power. Management did announce that it will look to monetize some 100 million accounts that are using shared passwords. However, this does raise the question of why management hasn’t addressed this freeloader issue already. What’s more, curtailing password sharing seems like a tactical plan that doesn’t address the strategic question: Can Netflix compete with its new competitors and their immense content libraries?

For me, the chart above shows the biggest problem for Netflix: Making new movies and tv shows costs money — lots of money. Disney already outspent Netflix by 47% in 2021 (the most recent year content spend data is available for both companies). Plus, Disney already owns decades’ worth of classic content, including Star Wars, Marvel, Pixar, and its famous animation studio. 
I’m skeptical that Netflix has what it takes to compete now that the sharks are circling. I’d steer clear of Netflix until it can prove that the company can recover pricing power and subscribers.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch owns Amazon and Walt Disney. The Motley Fool owns and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends Comcast and Warner Bros. Discovery, Inc. and 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. –

It’s been a horrible six months for Netflix (NASDAQ: NFLX). Its share price has crashed an astounding 70% from its all-time high of $691.69 per share on Nov. 17, 2021. Adding to the misery, the company announced an unexpected dip in subscribers during its most recent quarter.

So, is this a buying opportunity, or should investors steer clear of Netflix? Let’s dive in.

Image source: Getty Images.

Why Netflix has been in free fall

Netflix shares have tumbled for two main reasons: 

Growth stocks, in general, have fallen out of favor.
Netflix subscriber growth appears to have peaked.

The first concern goes far beyond Netflix. Investors have soured on high-multiple growth stocks with inflation high and the Federal Reserve tightening interest rates. 

However, the second problem is company-specific — and not easily solved. The market for on-demand video streaming is now ultra-competitive. The number of streaming services seems almost endless, with some of the biggest corporate names battling it out for their share of monthly subscriber fees. Walt DisneyAppleAmazonParamountComcast, and Warner Bros. Discovery have all jumped into the streaming wars, creating competitive headwinds for Netflix that didn’t exist a few years ago. As a result, Netflix lost subscribers for the first time in a decade, signaling that — perhaps — its subscriber base has finally peaked.

Is this a buying opportunity?

Somewhat lost in the mayhem of Netflix’s post-earnings slide was the news that the company is considering an ad-supported model. This announcement departs from the company’s long-held view that its content should be ad-free.

Moreover, the company expects to lose 2 million subscribers in the second quarter, reinforcing the argument that Netflix does not have pricing power. Management did announce that it will look to monetize some 100 million accounts that are using shared passwords. However, this does raise the question of why management hasn’t addressed this freeloader issue already. What’s more, curtailing password sharing seems like a tactical plan that doesn’t address the strategic question: Can Netflix compete with its new competitors and their immense content libraries?

For me, the chart above shows the biggest problem for Netflix: Making new movies and tv shows costs money — lots of money. Disney already outspent Netflix by 47% in 2021 (the most recent year content spend data is available for both companies). Plus, Disney already owns decades’ worth of classic content, including Star Wars, Marvel, Pixar, and its famous animation studio. 

I’m skeptical that Netflix has what it takes to compete now that the sharks are circling. I’d steer clear of Netflix until it can prove that the company can recover pricing power and subscribers.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch owns Amazon and Walt Disney. The Motley Fool owns and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends Comcast and Warner Bros. Discovery, Inc. and 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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