In this clip from "The Rank" on Motley Fool Live, recorded on Feb. 7, Motley Fool contributors Taylor Carmichael, Jason Hall, and Matt Frankel discuss why now might not be the time to invest in Netflix (NFLX -1.23%) given the competitive landscape, rising interest rates, and the growing pressure on customers to choose, and potentially eliminate, certain streaming services.
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Taylor Carmichael: You know, it's funny. I was exactly the same thing, Matt. I was really surprised that you all ranked it as low as you did. In my case, I might hold a grudge against Netflix. I sold it 12 years ago, which is like leaving a million dollars on a bus. Maybe now it's $500,000 on a bus. I'm always irritable whenever I bring up Netflix because I sold it. I think part of it, why they got hit, is they had a high multiple. Netflix had a very high multiple and, this particular crash, there was a lot of multiple shedding. In this particular case, I don't actually think they are going to get that big multiple again. I look at it and I'm like that's fairly valued for their growth rate. Their growth rate is not super exciting. I don't have a lot prepared. Let me share the screen.
Jason Hall: Here you go, Taylor, here's your price-to-sales ratio?
Hall: I'll do a quick percentage on. That's the past three years, right? Revenue over the trailing 12 months.
Carmichael: Yeah, they're growing under 20%. Their growth is not super. I don't even know if they're growing much in the U.S., most of its abroad I think. We all know what Netflix does. They just have, I don't want to say a monopoly, but they have a really strong position, a really strong brand in streaming, in how we consume movies and TV shows now, and a really big advantage over the traditional cable providers, or even the network providers where you had a set time. If you want to see Cheers, you had to show up Thursday at nine. Netflix gives you the power to watch any show you want, whenever you want, any movie you want, whenever you want. It's a lot of viewer flexibility that people really like. Their big competitors, I would guess Amazon (AMZN -0.13%) would be the main one. I don't know that I can prove this, but I feel like a lot of people are probably irritated at how many streaming services they have to subscribe to and keep up with to rebuild their viewing. I assume a lot of people subscribe to two or three of these. They subscribe to Netflix. They probably have Amazon Prime. They might subscribe to Disney (DIS -1.62%). I don't think Netflix is going to be that one that people cut necessarily. But, I'm not particularly excited by this stock. I think it's a huge company already. It's a $120 billion, $130 billion company, and it has gotten whacked. It's not going to disappear. It's a strong company. I would think there are more exciting growth opportunities over the next five years, which is why I ranked them low. Why did you all rank them so low?
Matt Frankel: First of all, your Netflix is like my Tesla (TSLA -3.20%). I sold Tesla in 2012 and we all know how that worked out. I feel I'm a little bit biased toward the downside on that stock even if we're doing things right. The reason I ranked Netflix low is, I feel their pricing power is eroding slowly. What I mean by that is, you mentioned that now everyone has to have two, three, four streaming services. I generally consider Netflix, Prime, and Disney Plus the trio that everyone has to have.
Hall: That's the core.
Frankel: Then, there is the one-off ones, like [Comcast (CMCSA -0.55%)] Peacock is one of the newer ones. There's a bunch of smaller ones that are a little more niche. Then, there is the live TV streaming services. If you want some live channels, you can get [DISH Network (DISH -1.18%)] Sling or [Google (GOOG 0.20%)] YouTube Premium or one like that. Before you know it, you've replaced your entire cable bill from being a cord-cutter.
Hall: I'm old enough to remember when we were promised everything would be cheaper.
Frankel: Back when you could just have Netflix, they had a lot more power like when they went from $8.99 to $12.99. Everyone said, "Oh, I'm still paying $13 a month for cable." I just got a notification when I logged into Netflix that they are increasing it further to $19.99 for my plan. It's not just increasing it from $15 or whatever it was to $19.99, now, you're increasing my total cost of streaming from $80 to $85, which is a bigger deal to a lot of Americans. Disney Plus recently made an increase. Amazon just announced that it's increasing the price of Prime, which gets you other stuff but, even so, it's an increase. Before long, people are going to have to start to pick and choose their favorites. I'll tell you, in my household, we would get rid of Netflix before we got rid of Prime or Disney Plus. I have two little kids and we like free shipping. Netflix would have to go out of the three if we had to make a sacrifice. I feel the pricing power erodes over time.
Hall: I think that's true and some other things I think have happened too. I showed earlier the multiple and Netflix now trades for about six times, trailing 12-month sales. That puts it basically in line with where it traded in 2017, 2016, somewhere in that area. I think there was an argument that it was probably a little undervalued because it didn't grow tremendously. Low double-digit growth isn't terrible 12%, 15%, 18% a year is not bad. But, in a world where you have a big cash-flow positive business that just has to take that cash flow and put it right back into the business to develop new content because of the competition and because it has lost pricing power to some degree like Matt was talking about. I think it is going to be harder to continue to raise prices. Back to Taylor's point, I think there's a million better investment opportunities out there and I think the market is going to continue to devalue Netflix as a growth story at a premium valuation, especially as interest rates start to rise and we see more of a revaluing of the market in aggregate. Matt?
Frankel: I feel Netflix is in the same transition from growth to value that Apple (AAPL 0.85%) went through five years ago.
Frankel: I feel it's at that stage of the business cycle.