The misery goes on for owners of Netflix (NFLX 1.31%). Shares of the streaming giant are down 68% over the last year, while the Nasdaq Composite fell 23% during the same period.
With the company set to release second-quarter earnings results on July 19, many people are asking if now is the time to buy. Let's have a look at two reasons to buy and one reason to sell.
First reason to buy: A possible rebound on the horizon?
It's important to remember why Netflix has fallen so far, so fast. For the first time in years, the company reported a loss of subscribers back in its April earnings report. Moreover, the company announced that it expected to lose another two million subscribers in the second quarter.
However, if Netflix can somehow stabilize its subscriber numbers in the second quarter, Wall Street would have to reconsider the thesis that Netflix's growth days are behind it. Not only would the stock get a short-term boost, but it could be the start of a new uptrend.
But it's not just subscriber numbers that could provide a boost in sentiment. The company recently announced it would partner with Microsoft (MSFT 0.17%) to develop its ad-supported streaming tier. Netflix's plans for a low-cost, ad-supported tier were largely undeveloped back in April, but over the last few months, management should have set their plans in motion. The bulls will hope that the concept management has come up with is a compelling one.
What's more, if the company beats earnings estimates, or provides upbeat guidance, much of the negative sentiment around the stock should fade, paving the way for a second reason to buy the stock.
Second reason to buy: Netflix is becoming a value stock
If there's a silver lining to Netflix's performance over the last year, it's this: The company's share price has already fallen significantly. A year ago, Netflix's market capitalization of $240 billion was within a breath of its rival Comcast (CMCSA -0.95%), which had a market cap of about $250 billion. Today, Netflix's market cap is around $80 billion, while Comcast is more than twice that at $179 billion.
All of this share price destruction makes Netflix's valuation far more attractive. In fact, what seems to be happening is that the company is transitioning from a growth stock to a value stock.
NFLX PE Ratio data by YCharts.
As you can see, the comparison to Comcast illustrates this effect. A year ago, Netflix's price-to-earnings ratio was hovering near 60, and Comcast was near 20. Now, the two companies' P/E ratios have almost converged in the mid-teens. As Netflix becomes more and more of a traditional entertainment studio, it will need to grow its earnings to raise its stock price, which might prove easier than growing its user base.
Reason to sell: What if subscribers drop even more than expected?
Times are tough. Inflation is making it harder for consumers to pay for groceries and gasoline. The big question for Netflix (and many other subscription-based companies) is this: How "sticky" are its subscribers? Will people continue to shell out for streaming content in this economy?
This is the big risk of owning Netflix. Despite its ongoing transition to a value stock, Netflix shares will drop -- precipitously -- if its subscribers continue to flee.
Moreover, initial reports indicate that Netflix's attempt to crack down on password sharing isn't going well. The company is testing the new policy in South America, and it seems to be causing a significant amount of confusion and irritation among subscribers. As it turns out, defining who is -- and who is not -- part of a household might be more complicated than initially thought.
Is it time to buy Netflix?
While its valuation is tempting, I'm not biting on Netflix. If the company can put together a great quarter, stabilize its subscribers, and offer a clear plan for making its ad-supported tier must-see streaming TV, I'll reconsider. But for now, I'll stay on the sidelines.
