This hasn't been a great year for Netflix (NFLX +1.95%). The stock is down 19% to date as of writing. And even worse, it has declined about 43% from its most recent high. While the company remains the leader in streaming, Netflix's poor second-quarter guidance, a leadership change, and a long acquisition battle that failed to materialize have all taken a toll on the stock. Investors may wonder what will happen next and whether this is a good time to scoop up Netflix's shares on the dip. Previous instances of the stock dropping by 40% or more might give us a clue.
Image source: The Motley Fool.
Why the stock could fall even further
In some cases, Netflix's massive declines bottom out at around 40%. That's what happened between mid and late 2018, when the stock dropped by that much and subsequently recovered.
However, in other cases, it dips significantly further before eventually rebounding. Between late 2021 and mid-2022, Netflix's stock dropped by more than 70%.
Will this time around be more like the first instance or the second? Note that in 2018 and 2021, Netflix's issues stemmed from subscriber growth (or lack thereof). The stock bounced back after overcoming this obstacle. There are reasons to think the company hasn't yet addressed all the problems that are driving its ongoing sell-off. For instance, Netflix is reportedly experiencing low subscriber engagement. That can hurt its business in multiple ways, including lower-than-expected ad revenue, fewer data points to inform its content library, and less excitement around its new releases, which can harm subscriber growth.
This problem could lead to weak revenue growth in its upcoming second quarter (with results scheduled for release on July 16), and equally unimpressive guidance, potentially sending the stock sharply lower. Further, Netflix is dealing with an increasingly competitive landscape. With Paramount pulling off a major acquisition (snatching it from Netflix, no less) that will significantly expand its content library and make it a stronger streaming platform, Disney getting a majority stake in FuboTV, and Fox acquiring Roku, the competition is improving. Those are some reasons the stock may not have bottomed out yet.
NASDAQ: NFLX
Key Data Points
Should you give up on Netflix?
One thing Netflix's past dips have in common is that it was generally a good idea to buy the company's shares while the stock was dropping, and not necessarily at the bottom, which is impossible to time. My view is that investors who initiate positions right now (or acquire more shares) will also be handsomely rewarded down the road. Here's why. Despite the issues it faces, Netflix's large ecosystem can enable it to explore new ways to monetize its audience and boost engagement.
That's what it did back in 2022, when it faced declining subscribers -- as more streaming platforms entered the market -- and password-sharing that took a bite out of its revenue potential. Netflix introduced several initiatives, including a low-priced ad-supported tier and a way to address password-sharing. Netflix is already exploring ways to overcome its current challenges.
The company is reportedly thinking about launching live TV channels. Other streaming leaders have had great success with this, but few -- if any -- of them benefit from Netflix's large ecosystem and brand recognition, which could make its live channels practically an instant hit. The company is also considering bidding for future World Cups, given the massive success of the current one.
This is part of Netflix's broader strategy to expand its footprint into the live sports niche, something that could also increase engagement and attract significantly more subscribers to the platform. So, Netflix may be dealing with issues -- and the stock might decline even more after its upcoming update. But for long-term investors, the streaming specialist remains an attractive buy, especially at current levels, as it launches new initiatives to overcome its current challenges.
