There's no question that Netflix (NASDAQ:NFLX) has been one of the best stocks on the market over the last decade. Since the beginning of 2012, when shares were left for dead following the failed Qwikster spinoff, Netflix stock has surged more than 2,500%. The company has ridden the global cord-cutting wave and become the undisputed streaming champion with more than 150 million subscribers around the world.  

But more recently, the stock has shown signs of fatigue. In its second quarter, the company reported its first domestic subscriber loss since 2011, setting off alarm bells, as overall subscriber growth was also significantly slower than expected. The company said it added just 2.7 million members instead of the 5 million it had projected.

As a result of this and fears about rising competition, Netflix stock is down about 40% from its all-time high last summer of $423 a share.

Plenty of investors are wondering if the current sell-off is a buying opportunity. Let's look at the key drivers that you should know about before you decide to pull the trigger.

The Netflix menu featuring Stranger Things.

Image source: Netflix.

Competition is heating up

For years, Netflix downplayed the threat of competition, arguing that demand for video entertainment was so vast that the industry could accommodate several streaming operators.

But CEO Reed Hastings seems to be having second thoughts. Netflix stock dipped as much as 7% after Hastings said at a conference last week: "While we've been competing with many people in the last decade, it's a whole new world starting in November ... between Apple (NASDAQ:AAPL) launching, and Disney (NYSE:DIS) launching, and of course Amazon's ramping up. It'll be tough competition." 

That is no exaggeration. Disney+ will be launched this November, stocked with classic Disney movies and new Marvel original series. Apple TV+ will also arrive this November, featuring content from popular creators and actors like Samuel L. Jackson, Steve Carell, and Jennifer Aniston.  The monthly starting price for each service -- $6.99 for Disney+ and $4.99 for Apple TV+ -- is significantly cheaper than Netflix, whose standard package costs $13 a month.

AT&T (NYSE:T) is set to launch HBO Max next spring, including HBO, Warner Bros. movies, original content, and licensed shows like Friends and The Fresh Prince of Bel-Air.  Finally, NBCUniversal is introducing its own streaming service next April, called Peacock, which will feature original content and classic shows like The Office and Parks and Recreation. Pricing has not yet been announced for HBO Max or Peacock. 

The new services will certainly compete for viewership, but just as important, they will also bid on content, meaning Netflix's days as the primary streaming buyer for network shows are over. This challenge became clear this summer when Netflix lost both The Office and Friends, its two most-popular shows. Hastings also acknowledged that the new competition will mean content costs will rise, and it will also make it harder to raise prices for subscribers as the company did earlier this year. 

Subscriber growth concerns

Just as Netflix is about to face a wave of new competition, the company spooked investors for a totally different reason. Subscriber growth suddenly slowed in the second quarter. Netflix actually lost domestic members for the first time since 2011, perhaps a result of the price hike, and its overall subscriber increase of 2.7 million was much worse than the company's own forecast of 5 million. To be fair, the disappointing results came after the company had its two biggest quarters of subscriber growth ever, so some of those new members may have gotten pulled into earlier quarters, but subscriber growth is crucial for Netflix given its lofty valuation.

With domestic membership now at 60 million, Netflix has already reached the bottom end of its long-term domestic subscriber forecast range of 60 million to 90 million. In other words, the vast majority of the company's future growth is going to come from international markets. It expects a recovery in the third quarter, projecting 7 million new members, but prospective investors should keep an eye on that report. Two subscriber misses in a row, especially ahead of the Disney and Apple launches, could be a red flag.

That price tag

While investors might think Netflix stock is cheap after its recent sell-off, it is still richly valued based on almost any conventional metric. Netflix expects to lose $3.5 billion in free cash flow this year, and has taken on $12.6 billion in debt to fund its original-content spending spree. On a price-to-earnings basis, the stock is trading at 100 times earnings, meaning it could have a lot further to fall if its growth plans run off track.

By contrast, Netflix's new competitors are almost all priced below the market average as these are companies with strong legacy businesses, and therefore have the cash flow to plow into video streaming, which they see as a high-growth business. Disney and NBC parent Comcast trade at a P/E of 17; Apple goes for 18.5; AT&T has a P/E of just 10.

Netflix has been such a great stock over the years in part because it's consistently bucked the odds and proved the critics wrong. If the streamer can do it this time around, the stock will soar, but that's a tall task considering competition is increasing and subscriber growth may be slowing. Investors thinking about buying Netflix stock should be aware of the significant risks the company faces.