Netflix (NFLX -1.53%) is in a world of trouble. At least that's what many detractors said -- and kept saying -- as challenges to the company's business piled on. Increased competition, lower revenue growth, password sharing, and slower net new additions have plagued Netflix over the past few years. However, the company refuses to break under pressure.
And although Netflix may no longer be able to deliver the incredible returns it did during the 2010s, there are still solid reasons to invest in the stock this year, especially if a bull market kicks off after the downturn equities experienced last year. Let's consider two of those reasons.
1. Streaming is the future of TV entertainment
A quick Google search reveals that there are now more than 40 video streaming services. Few people can name more than a dozen or so of these, with the likes of Netflix and Disney+ dominating the pack. But the fact that so many options are popping up reveals something important about the industry -- namely, streaming is on an unstoppable growth path. Why else would so many companies go through the trouble of creating these platforms?
There are good reasons streaming is still gaining ground after contributing to the start of the cord-cutting trend. Cable television adheres to a strict, rigid format. If a show is scheduled for 9 p.m., the most viewers can do is record it or watch reruns. Streaming is different. The library of content it offers allows for greater viewing flexibility on multiple devices. Netflix helped pioneer this model, and the company is still looking at a massive global opportunity.
Here's one way to look at it. Netflix ended 2022 with 231 million paying users. But outside China, linear television peaked at about 800 million households, according to the company. So Netflix's penetration in this market at about 29% is substantially lower than 50%.
Here's another angle to consider. Streaming grabbed only 34.3% of television viewing time in the U.S. in February, a modest increase from 28.7% in February 2022. Note that more than 32%, or almost one-third, of Netflix's paying subscribers are in the U.S. or Canada. So there's still substantial room for Netflix to increase both its users and its share of television viewing time in the U.S. and especially abroad. That will matter even more now that Netflix has introduced a low-priced ad-supported tier.
The longer it keeps viewers glued to their screens, the more businesses will see the platform as an ideal place to target potential customers, leading to higher ad-related revenue. This opportunity will take time to fully materialize as Netflix's ad-supported tier is less than a year old. But it helps show the potential long-term growth opportunity that's still at the company's disposal.
2. Moats matter, and Netflix has one
The growth in streaming will benefit plenty of companies other than Netflix. So why do I think the tech giant can remain one of the leaders in five or 10 years? After all, Netflix doesn't benefit from high switching costs. It's easy for viewers to cancel their subscriptions and opt for one of the company's competitors. Fortunately, Netflix does benefit from a competitive edge, arguably from two different sources.
First, Netflix has become synonymous with streaming. It's often used as a verb, even. This kind of name recognition matters. Anyone who has driven children around town knows how excited they get once they see the famous McDonald's logo, prompting parents to make an often unplanned trip inside. Apple is another renowned brand that gets away with outrageous prices for its gadgets, partly because they bear its famous logo. Netflix is perhaps not at the level of these two giants, but its brand name is still highly recognizable, and that's a significant advantage.
Second, Netflix's massive customer base allows it to collect valuable data on viewer habits. It uses this data to recommend similar shows to interested customers, keeping them glued to their screens. And, just as important, Netflix uses it to create new productions based on what people love to watch on its platform. The movies and series it creates that people love become popular as they spread through word of mouth. That allows the company to attract even more people to its streaming ecosystem, further reinforcing this dynamic.
That's how Netflix can remain near the top of the streaming world.
Look beyond Netflix's recent issues
Netflix has tried to address its problems. The company said it will introduce a solution to password sharing this year by requiring its subscribers to pay for "sub-accounts" used by people who aren't in the same household. The company's decision to start a low-price ad-supported option will help jump-start subscriber growth.
While things won't improve overnight, Netflix still has plenty of white space left in streaming. And given the company's moat, it is well positioned to deliver solid returns for years. That's why investors should scoop up the company's shares before the next bull market.
