Netflix (NFLX -1.12%) stock is having a fantastic year in 2015. Shares of the online-streaming leader are up by more than 110% during the last 12 months. However, things took a big turn in the last two months, and Netflix has lost more than 20% from its highs of the year.
This raises a big question for investors: Is the recent pullback in Netflix stock a buying opportunity, or is it better to stay away from the company before things get even worse?
The reasons behind the decline
Netflix is a particularly volatile stock, and recent performance needs to be analyzed in its due context. Stock markets have been under selling pressure because of bad economic news from China and uncertainty regarding interest rates in the U.S. The Nasdaq index, for example, has declined by nearly 7% in the last quarter. Investors typically look for safety and predictability in times of economic uncertainty, so risky growth names such as Netflix tend to suffer more than big and stable companies in these kinds of scenarios.
In addition, competitive pressure has been on the rise lately. According to a news report from Variety, Apple is working on its own original video content to power its Apple TV platform. The company has not provided any official details about this project, and it's hard to tell how seriously committed Apple is to original content. On the other hand, with more than $200 billion in cash and tremendous brand power, Apple is clearly not a competitor to underestimate.
Amazon (AMZN 3.04%) is another competitor to watch. The online retail king has recently announced that Prime subscribers will be able to download Prime Instant videos to their devices. This can be particularly useful when traveling, or when in any place without a good Internet connection, for that matter. Netflix doesn't offer this feature, and it's not planning to provide downloading capabilities any time soon.
Adding to the concerns, Netflix underperformed both Amazon and Time Warner's HBO in the latest Emmy Awards. HBO was the big winner, with a whopping 34 awards, while Amazon also did quite well, taking home five statues. Netflix had 34 nominations this year, but it won only four Emmy awards versus seven statues in 2014.
None of these factors by itself is a big game changer, but the competitive landscape is clearly becoming more challenging for Netflix. This is an important risk to watch.
This movie is just getting started
Success attracts the competition. Netflix has been a booming success during the last several years, so it's really no wonder to see multiple players increasing their presence in video streaming. Still, only because competition is increasing, that's hardly a smart reason to sell Netflix.
Online streaming is a remarkably attractive business offering enormous room for growth in the coming years. Just like traditional TV has allowed different industry players with their own strategies to grow and thrive over time, there's no reason to believe that online video will be a zero-sum game in which a single winner takes all. Online TV alternatives are still much cheaper than linear pay-TV options, and consumers can subscribe to multiple providers for a reasonable cost.
In any case, subscribers just love Netflix, and the company's customer proposition is already well proven. Netflix is competitively priced at only $8.99 per month versus $14.99 per month for HBO Now. Original shows such as House of Cards and Orange Is the New Black have been massively successful.
Netflix is changing its focus when it comes to content, putting more weight on original productions, and prioritizing quality over quantity. This seems to be the way to go judging by the amazing growth in the company's subscriber base during the last several years.
Netflix ended the second quarter of 2015 with a total of 65.5 million members, gaining 3.28 million new subscribers during the quarter. Just three years ago, Netflix was reporting only 25.8 million members around the world for the second quarter of 2012.
Growth rates have been truly explosive, and the company is accelerating its international expansion plans during the coming two years on the back of higher-than-expected global demand. The way things are going, Netflix looks well positioned to continue firing on all cylinders over the middle term.
A growing subscriber base means more revenue for Netflix, and more money to spend on content. Besides, the company has access to all kinds of information about the viewing habits and preferences of subscribers, and management knows how to capitalize on that data to make smart decisions when it comes to buying and producing content. This is a key source of competitive differentiation for Netflix.
A couple of months ago, Netflix stock was making new historical records, and it seemed like the company was immune to all kinds of risks. After a 20% adjustment, everyone is expecting the competitive landscape to become more challenging in the coming years, and this is already reflected in the stock price. If you liked Netflix stock two months ago, maybe you should like it even more now.