After soaring in the early stages of the pandemic, streaming giant Netflix (NFLX +0.34%) has seen its shares plummet -- down 67% off their high. The company is struggling to regain its footing as the world reopens following the outbreak of COVID-19 and as several streaming competitors enter the fray.
After being cooped up at home for so long, consumers are eager to spend more of their time and money on away-from-home experiences. Rising competition amid decreasing customer demand is not a recipe for success.
That said, the market is arguably overreacting to the slate of bad news coming out of Netflix. The company is still one of the best streaming businesses with over 200 million subscribers and nearly $30 billion in annual revenue.
Let's see why the outlook from here could be a lot brighter.
NASDAQ: NFLX
Key Data Points
Netflix expects subscriber losses to reverse
Netflix boasts 220.6 million subs as of June 30. That was over 10 million more than it had at the same time last year, but 970,000 fewer than from the previous quarter. After more than a decade of consistent user growth, Netflix experienced two quarters of a decline. Fortunately, management has forecast it will add 1 million subs in its next quarter and end the two-quarter streak of losses.
NFLX Revenue (Quarterly) data by YCharts.
In the quarter ended on June 30, Netflix generated $8 billion in revenue, annualizing to $32 billion. The massive base of recurring revenue is a competitive advantage; the company can use that money on developing new content to attract more subscribers and retain existing ones. After all, isn't that why folks subscribe to streaming services? In its most recent six months, Netflix spent $8.3 billion adding to its content library.
Furthermore, Netflix has spent more than a decade climbing the learning curve. As the years progressed, Netflix produced more hit titles, including Stranger Things, Squid Games, and House of Cards. Indeed, according to Nielsen, consumers spent more time viewing content on Netflix than on any other service provider.
Netflix stock is cheap, but that may not last
Still, the headwinds Netflix faces in the near term are substantial. Consumers are spending less time at home streaming content. Simultaneously, several competitors have encroached on Netflix's arena, mostly pricing their services lower.
Many folks are opting for those lower-priced subscriptions because of their value, to be sure, but also because of newness -- they want to see what content is available elsewhere. Many lower-priced services are losing money, making their pricing structure unsustainable. For instance, Walt Disney's (DIS +7.60%) Disney+ lost nearly $1.1 billion in operating income in its most recently completed quarter.
NFLX PE Ratio data by YCharts.
Eventually, they'll need to raise prices. Disney+ already announced significant price increases coming later this year. As competitors increase prices and the newness fades, Netflix's competitive position will likely improve.
Nevertheless, the near-term headwinds have brought Netflix's stock lower. It's currently trading at a price-to-earnings ratio of 20, the lowest in the last five years. Investors would be prudent to buy this undervalued stock before everyone else does.
