What Long-Term Investors Need to Know About Netflix Stock

Netflix (NFLX -0.51%) stock dropped precipitously after the streaming giant reported worse-than-expected first-quarter earnings results on Tuesday. Factors leading to the stock's slide were slowing customer demand -- the number of its subscribers fell for the first time in more than a decade -- and rising competition from the likes of Disney and the newly formed Warner Bros. Discovery. In this episode of "The Rank" on Motley Fool Live, recorded on April 11, Fool.com contributors Brian Withers, Matt Frankel, and Jason Hall discuss what the company's latest struggles mean for long-term investors.

Brian Withers: Netflix, interestingly enough, it actually tied Booking Holdings for No. 6.

Jason Hall: That's right.

Withers: Part of I think what's happened to Netflix recently is important for long-term investors to understand, is you see the E there, and then this precipitous drop right afterwards. Netflix in its most recent quarter announced outlooks, you can see that Q1 outlook of 10% and subscriber growth of only 2.5 million. That really spooked investors off, and the stock sold down considerably right after earnings. There's a question, I think short-term investors are looking at Netflix and going, "Is the growth run out of this company?" To me, when I look at a company that is streaming video in 190 countries around the world. Let me say that again, 190 countries [laughs] around the world. Things like Squid Game, which originated out of Korea, is hitting it globally. They have a tremendous business as the company looks to localize content, and the streaming business just gets more and more affordable to customers around the world. Netflix is one of those sticky services that once you get it, I don't even know how much I pay for Netflix, but I totally wouldn't give it up even though we've signed on to a number of other different streaming providers. Netflix has had a tremendous long-term history, but now it's getting into that matured stage where it mentioned it's going to be free cash flow positive soon. It continues to have a lot of debt, which may be a concern why some of you ranked this one lower. I ended up ranking this one 5, and mainly because I think the optionality, it certainly is doing great with streaming video. It's getting into games. I don't know. That's a wild card of how that's going to do, but I don't know that this has as much optionality as some of the other companies that I put ahead of it.

Hall: Matt, you and I both ranked it seventh.

Matt Frankel: Yeah. I think the subscriber growth, I don't think it's done, I think it's going to cool off for a while because a lot of it was pulled forward due to the pandemic, and I think that the streaming competition heating up, Disney+, all this, whatever Discovery is cooking up, and things like that, I don't necessarily think they're going to eat subscribers away from Netflix, but I think it's going to eat into their pricing power. Right now, they've had no problem making price hikes. That's one of the things in the slide you see here under Concerns. They've done a great job of figuring out just how much they can raise prices without significantly impacting their membership base, but I think their ability to do that is going to dwindle as people are paying $100 a month for all of their streaming services. The price hikes are going to start hurting their members more. That's one of the reasons I ranked it low.

Hall: Yeah, I think it's one of those things where I think it can be like lazy analysis just to throw out competition as a risk. But I think in fairness, I think about Tesla and I think about Netflix in the same bucket here that they had such a first-mover advantage in their business, and they were largely ignored for years and years, and here we are. What are all the big automakers doing? Investing billions and billions of dollars to build electric vehicles. What are all of the content owners doing? Investing [laughs] billions and billions of dollars to really target streaming. I agree with Brian. I don't think that's going to cause cancellations to happen, I don't think it's going to cause the business to shrink. Does it affect the pricing power? Maybe to some extent. I think it's the cost advantage because I think they're going to have to compete a lot harder to buy content and to develop content and to get talented people lined up to make content under the Netflix umbrella. I'm not so much worried on the pricing power side as I am on the cost side. It's a cash flow positive business, it's going to be going forward, management said that. But that cash flow is not going to flow down to investors. It's going to immediately go out the door to increasing content costs. I think we're maybe underappreciating that. I'm not anchoring on that price where it was back in November. That high price up there, I think the market adjusted down because of reevaluating its prospects and those pressures.