Shares of Netflix (NFLX -0.94%) performed exceptionally well in the last decade, but a lot has changed in recent years. The company is struggling with multiple headwinds, and many investors are jumping ship. But many others still see plenty of room for Netflix to grow.
And considering that the tech company's stock has significantly lagged the market in the past few months, the bulls even argue that it is a steal at current levels. Who is right? Let's dig deeper into what's going on and decide.
The bear case
Netflix pioneered the streaming industry, and in the early days, the company had very few direct competitors. Things have changed drastically since then. There are so many streaming options that consumers can barely keep up. That also means the fight is raging to attract new customers while retaining existing ones, and Netflix is having a tough go of it.
During the first quarter, it lost 200,000 subscribers. Not only was that significantly below the 3.98 million net additions recorded in the first quarter of 2021, but it was also well below its projection of 2.5 million new subscribers.
Naturally, investors weren't happy, and a sell-off ensued. To turn its subscriber numbers in the right direction again, Netflix can rely on a tried-and-true strategy that has served it well over the years: original content. The problem is, this strategy isn't cheap -- not by a long shot. The company plans on allocating $18 billion this year to content creation, which could squeeze its bottom line (and its margins) if it continues to lose subscribers.
Another problem is password sharing. The company estimates that Netflix accounts are being shared with more than 100 million households. That's not a trivial number: The company ended the first quarter with 222 million paid subscriptions. An additional 100 million would mean plenty more revenue, but it is leaving all this money on the table due to password sharing.
Combine this with the competition it faces and the substantial sums it is spending to remain competitive, and things might not look good for Netflix.
The bull case
There remains plenty of untapped potential in the streaming industry. The company is looking to replace linear television, which, according to management, peaked at 800 million cable viewing households worldwide outside of China. That means Netflix's 222 million subscribers could still grow substantially.
And the company can count on the strong brand it has built. Netflix was the 26th most valuable brand in the world in 2020, according to Forbes.
With that said, management will still need to find ways to navigate the competitive landscape and jump-start user growth. It can introduce lower-priced membership options with ads. These could attract more price-sensitive users, while also helping to monetize the 100 million households that are watching for free.
The downside here is that management had previously said that showing ads on the platform would never be on the table. Still, it could be an excellent solution to the subscriber losses and the heavy competition the company currently faces.
Too early to give up on Netflix
I remain firmly in the bull camp for Netflix. While investors' eyes are always on the subscriber growth numbers, it is worth noting that Netflix continues to record decent financial results. In the first quarter, revenue grew 9.8% year over year to $7.9 billion, while earnings per share declined by 5.9% year over year to $3.53. However, the bottom line did exceed analysts' estimates while revenue was in line with expectations.
Subscriber growth is important for streaming companies, but it isn't everything, and Netflix has a knack for figuring things out. The company's (potential) plans to add lower-priced options could be a major tool in helping it get back on the right track. Meanwhile, the stock is cheaper now than it has been in a while.
The company's hypergrowth days might be over, but that does not mean the stock is no longer worth owning. At current levels, I'd argue that it is a solid buy considering the whitespace there remains in the streaming industry and the company's ability to figure out ways to attract new users. It's far too early to give up on Netflix.