Media streaming veteran Netflix (NFLX +0.34%) has been a polarizing investment for many years, but the bulls have been winning the battle in 2022. The stock is down by nearly 70% year to date, driven by some disturbing details in two earnings reports.
Should investors turn their backs on Netflix today, or is the stock a fantastic buy at these lower prices? We asked two of The Motley Fool's top consumer goods specialists to weigh in on the matter, and this is what they said.
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Bull case: Rumors of Netflix's death are greatly exaggerated
Anders Bylund: Did you know that Netflix fits the description of a traditional value stock nowadays? The stock is trading at the lightweight valuation ratios of 19 times earnings, three times sales, and five times book value. Across all these metrics, Netflix is more affordable than classic value stocks Procter & Gamble or Johnson & Johnson.
Netflix shares are back to prices last seen in 2017 due to an exaggerated focus on slow subscriber additions at the start of 2022. I mean, it makes sense. If customers aren't signing up as quickly as they used to, surely Netflix is running out of low-hanging fruit and must pursue revenue growth in new ways.
And that's exactly what Netflix is doing.
Newer business ideas include a portfolio of video games, exploring ad-supported subscription models, and boosting subscription prices. A big round of price increases took effect around the new year, discouraging price-sensitive consumers from adding this service. So the company lost 200,000 subscribers in the first quarter -- but revenues increased by 2% from the previous quarter. On a year-over-year basis, top-line sales rose 10% while the global subscriber count increased by 7% to 221.6 million names.
So Netflix's business is actually doing great when you also consider its revenue and profit trends, and management is also taking action to keep the good times rolling. Going forward, you should also keep in mind that video-streaming services still account for a small portion of the time and money global consumers spend on video entertainment. Broadcast TV, cable services, and movie theaters are the legacy names to beat, and there's a long way left to go.
Despite some disappointing subscriber counts, Netflix is growing sales and earnings at a brisk pace. The stock is back to prices not seen since the fall of 2017. I call that an overreaction -- and a fantastic buy-in opportunity.
NFLX Revenue (TTM) data by YCharts
Bear case: Easy days are over for Netflix
Parkev Tatevosian: Netflix has grown phenomenally over the years. It had relatively little competition for more than a decade as it pioneered the streaming content industry. Legacy media companies watched as Netflix expanded to over 200 million subscribers worldwide. The media companies hesitated to respond because they made so much profit and cash flow from the cable TV business model.
That all changed during the pandemic. With billions of folks cooped up at home, demand for in-home entertainment surged. Meanwhile, people were hesitant to allow professional installers into their homes, so cable or satellite TV providers could not expand as quickly as streaming services. That was the perfect scenario for media companies to launch their own streaming services or invest more aggressively in existing ones.
Suddenly, Netflix faces a surge in new competition while demand for streaming entertainment is falling amid economic reopening. The company shed 200,000 subs in its most recent quarter and expects to lose two million more in the second quarter. There is no telling how far this drop will go or how long it will last.
NFLX Operating Margin (TTM) data by YCharts
Moreover, after years of expanding its operating profit margin, management noted it would flatten as it works to fend off competition and reinvigorate growth. Of course, Netflix may eventually win the streaming wars, but the battle will be expensive for all sides as content budgets soar. The easy days of growth are over for Netflix, which might be bad news for investors.
NASDAQ: NFLX
Key Data Points
Different strokes for different folks
If you agree with Parkev's view that Netflix is running out of easy growth options, you should probably park your hard-earned dollars elsewhere. If you prefer Anders' theory that the market overreacted to a short-term concern, this would be the time to pick up some Netflix shares on the cheap. In either case, we hope you learned something new from the other side of the Netflix argument.
