It's hard to fathom the quick reversal of Netflix's (NFLX 2.84%) business since the pandemic's onset. First, it thrived as billions of people were cooped up at home and demand for in-home entertainment surged. It also had the added benefit of an industrywide halt to content production during the initial phase of the pandemic. That meant reduced spending for Netflix coupled with an explosion of new customers. 

The boom turned around as several major studios launched streaming services of their own, and economies started relaxing business restrictions. With more entertainment options, both at home and away, fewer folks came looking for a Netflix subscription. The fallout has Netflix's stock down more than $150 billion in market value. At $79 billion, Netflix has not held a market capitalization this low since 2018. The beaten-down stock price has many investors asking if they should buy Netflix.

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Netflix faces several challenges 

Netflix already had a rough start to 2022, and things got worse when it updated investors in its first-quarter earnings announcement on April 19. In that report, Netflix said it lost 200,000 subscribers in the first quarter, which ended March 31, its first such loss in over a decade. To make matters worse, Netflix forecasts it will lose another 2 million subs in the second quarter. Overall, the company boasts 222 million subs, so the 2-million-subscriber loss would be relatively small, but it's the downward trend that has investors concerned.

After years of robust growth, Netflix is suddenly reversing course. Management attributed the turnaround to several factors, including the boom in signups during economic lockdowns, price increases, competition, unauthorized account sharing, and the Russian invasion of Ukraine. More specifically, Netflix estimates that 100 million people share accounts with other users who should be paying for the service. And the shutting down of Russian accounts led to losing 700,000 subscribers in Q1. It's unclear if Netflix will ever get those Russian subscribers back, but it is taking steps to monetize unauthorized accounts. It is reasonable to assume that Netflix will convert some of those 100 million shared accounts into new subscribers over time.

Headwinds aside, Netflix has grown to a scale where it reported $7.9 billion in revenue in the quarter ended in March. That was 6.7% higher than the same quarter in the last year and on pace for annual revenue of over $32 billion in 2022. That gives Netflix one of its streaming competitors' most enormous content budgets. It has spent over $9 billion on content in its previous two quarters alone. Ultimately, it's this programming that attracts subscribers and retains existing customers.

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What's more, Netflix's massive scale has it delivering excellent profit growth. From 2015 to 2021, Netflix has increased earnings per share (EPS) from $0.28 to $11.24. Whether Netflix shows a film to 50 million subscribers or 200 million, it costs the company almost the same. Therefore, the more it grows, the bigger the piece of incremental revenue flows to the bottom line. 

Two people watching television and eating popcorn.

Image source: Getty Images.

Is Netflix stock a good value? 

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Netflix stock has rarely been cheaper than it is right now. Trading at a price-to-sales ratio of 2.6 and a price-to-earnings of 16, Netflix is at its lowest valuation in the last five years. There is certainly justification for Netflix stock falling as headwinds hit the company in 2022. That said, it appears that the selling is overdone, and Netflix stock is selling at a bargain price. Long-term investors who can hold the stock for several years can feel good about adding Netflix shares to their portfolios.