Down More Than 30%, Is Now the Time to Buy Netflix?

If you want growth, Netflix has it in spades. But competition is increasing from all angles, even from seemingly marginal players like World Wrestling Entertainment. But don't let this fool you.

May 16, 2014 at 10:04AM

With Netflix (NASDAQ:NFLX) down more than 30% from its 52-week high, some investors might be looking for an opportunity to catch this falling knife. With the company reporting earnings recently, there are at least three reasons to believe that the recent drop may be just the opportunity long-term investors are looking for.

Contributing to future growth
Netflix has maintained for a while that it expects to fund its international growth plans by its cash flow from domestic streaming and DVDs. While it's true that Netflix's DVD business is still losing customers, the company's domestic streaming business is helping to offset this decline.

However, on the domestic front, the streaming business is getting much more competitive. For one, recently signed an exclusive deal for several HBO shows. Given that HBO has been named by Netflix as one of its primary competitors, this deal between Amazon and HBO would seem to be a direct shot at Netflix.

In addition, there is yet another new streaming service competing for viewership, albeit within a small niche, with Netflix. This service comes from World Wrestling Entertainment (NYSE:WWE). The WWE Network is priced at $9.99 per month, and it signed up 667,000 domestic subscribers in just the first 42 days.

What is unique about WWE Network is that the company owns all of the content. This puts WWE in a significantly better competitive position for wrestling content than Netflix or anyone else. WWE also offers a unique value proposition to its subscribers since they receive every pay-per-view event included in the WWE Network.

Given that WWE suggests that the company has about 80 million "active" fans of its programs, it seems likely that the less than 700,000 current subscribers are just a small part of the network's potential.

Even with these new challenges, Netflix is still seeing strong domestic streaming growth, and even more important, the company's contribution margin is growing. In the last three months, Netflix's domestic contribution margin rose to a new high of 25.2%. With the company's plan to increase the price of domestic streaming-only plans from $7.99 to $8.99, this margin will continue to climb.

Winning by breaking even
It's no secret that Netflix's biggest opportunity lies with its international expansion plans. There were two significant surprises from the company's international division in the last quarter. First, subscriber growth came in at 86%, year over year. Second, the company cut its contribution margin loss in half compared to last quarter, and it announced that existing international operations would break even this year.

On a relative basis, Amazon and WWE have very different business models on the international front. Amazon witnessed media sales growth overseas of just 4%, which was the slowest growth rate in the last five quarters. WWE expects to expand its WWE Network overseas, yet in the last three months, it staged no international events.

Though Netflix's next international expansion will hurt results in the short term, it's just the next logical step in the company's progress overseas.

Flow like no one else
Finally, Netflix is putting on a clinic when it comes to growing core operating cash flow, or net income plus depreciation. On one hand, WWE Network caused the company's operating cash flow to turn negative compared to last year. While Amazon's 40% increase in core operating cash flow over the prior year looks very strong, it's relatively slow-growing compared to Netflix.

On a year-over-year basis, Netflix just reported that core operating cash flow increased by more than 340%. It's true that Netflix has significant expenses due to content acquisition now and in the future. However, the company is able to write off a tremendous amount of these expenses as it amortizes its library.

Foolish final thoughts
In conclusion, Netflix's domestic streaming business is growing and should continue reporting stronger contribution margins. The company's existing international operations are expected to break even before some investors might have expected.

Investors who are worried about Netflix's big content expenses in the future need to look no further than the company's huge operating cash flow growth. With the stock down significantly from its highs, this could be a good opportunity for long-term growth investors.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Chad Henage owns shares of World Wrestling Entertainment. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers