Netflix (NFLX -0.99%) has taken investors on a wild ride over the past two years. The streaming media giant's shares surged during the buying frenzy in growth stocks and closed at an all-time high of $691.69 on Nov. 17, 2021.
However, Netflix's stock plummeted to a multiyear low of $164.28 on June 14, 2022, as its growth decelerated, it lost subscribers for the first time in over a decade, and rising interest rates deflated its valuations. But after sinking to that nadir, Netflix's stock more than doubled to about $380 over the past year.
Is it finally safe to buy Netflix's stock after those massive price swings? Let's review four reasons to buy Netflix and one reason to sell it -- to see whether it's still a good investment.
Image source: Getty Images.
1. Netflix's stabilizing growth rates
When Netflix lost paid subscribers in the second quarterof 2022, it finally admitted that it was facing stiff competition from other streaming media platforms. That warning convinced the bears that Netflix's high-growth days were over, and its growth would stall out as fierce competitors like Disney, Amazon, Warner Bros. Discovery, and Paramountcarved up the market. But if we look at Netflix's growth over the past year, we'll see it actually gained subscribers again, and its revenue growth stabilized.
Metric | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 |
|---|---|---|---|---|---|
Paid subscribers (millions) | 221.64 | 220.67 | 223.09 | 230.75 | 232.50 |
Growth (YOY) | 6.7% | 5.5% | 4.5% | 4% | 4.9% |
Revenue (billions) | $7.87 | $7.97 | $7.93 | $7.85 | $8.16 |
Growth (YOY) | 9.8% | 8.6% | 5.9% | 1.9% | 3.7% |
Data source: Netflix. YOY = year over year.
That stabilization can be attributed to three factors. First, it lapped its pandemic-induced growth spurt in 2020 and a post-pandemic slowdown in 2021. Second, it overcame the initial shock from Russia's invasion of Ukraine (which drove its loss of subscribers in the second quarter of 2022) over the following three quarters.
Lastly, it attracted new viewers with original hit shows like You, Outer Banks, and Ginny & Georgia, proving it could continue expanding without relying on established franchises.
2. The expansion of its advertising business
Netflix has traditionally generated most of its revenues by charging subscription fees for ad-free programming. But that changed last November when it launchedits cheaper ad-supported tier across a dozen markets.
This ad-supported tier could help Netflix attract more budget-conscious consumers while widening its moat against similar ad-supported tiers at Disney+, WBD's HBO Max, and Paramount+. It could also attract more advertisers and diversify its top line away from its ad-free subscription fees.
Netflix hasn't disclosed any revenue figures from its new ad-supported tier yet, but it recently revealed it had nearly five millionmonthly active users. That would only account for about 2% of its paid subscribers, but that ratio could climb as Netflix launches the tier in additional markets.
Based on eMarketer's projections, ad spending on connected TV (CTV) ads in the U.S. could more than double from $21.2 billion in 2022 to $43.6 billionin 2026 -- and Netflix will likely benefit from that secular boom.
3. Its crackdown on shared passwords
For years, Netflix looked the other way toward password sharers. But this year, it finally cracked down on the practice by charging extra fees for shared passwords. In its April shareholder letter, Netflix said it was "pleased with the results" of its crackdownacross Canada, New Zealand, Portugal, and Spain. It also noted that after that crackdown, its subscriber base in Canada was "growing faster" than its audience in the U.S. -- where it finally initiated its crackdown in late May.
That move might initially infuriate some of its longtime subscribers, but it could stabilize its long-term growth by boosting its revenues per household. Some of those password sharers might also shift toward its cheaper ad-supported tier.
4. Its stabilizing operating margins
Netflix's investments in new content and currency headwinds have squeezed its operating margins over the past year. However, it also expects its operating margin to expand from 18% in 2022 to 18%-20% in 2023 as its revenue growth stabilizes, the dollar weakens, it cuts costs, and it expands its higher-margin advertising business.
Those healthy operating margins suggest Netflix will remain the only profitable streaming video platform while Disney, WBD, and Paramount continue to rack up steep losses on their competing platforms.
The one reason to sell Netflix: its valuation
Analysts expect Netflix's revenue and adjusted earnings per shareto rise 7% and 11%, respectively, this year. But its stock still isn't a screaming bargain at 28 times forward earnings.
It's still being valued as a FAANG stockinstead of a traditional media company like Disney and Paramount, and it could be booted to the latter group if its growth in subscribers and revenues cools off again.
Netflix's stock isn't cheap, but its strengths easily outweigh the bearish concerns about its valuation. It won't surge back to its all-time highs anytime soon, but it's still a best-in-breed play on the long-term growth of the streaming media market.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon.com, Walt Disney, and Warner Bros. Discovery. The Motley Fool has positions in and recommends Amazon.com, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
I'm Leo Sun, an enthusiastic expert in the field of streaming media and technology investments, with a comprehensive understanding of companies like Netflix (NFLX) and their market dynamics. My insights stem from years of closely following the industry, analyzing financial reports, and monitoring trends to provide accurate and informed perspectives.
Now, diving into the provided article about Netflix's recent performance, let's break down the key concepts and reasons outlined in the article:
1. Netflix's Stabilizing Growth Rates:
- Netflix faced a setback with a loss of paid subscribers in Q2 2022 due to increased competition.
- Despite initial concerns, Netflix demonstrated resilience by gaining subscribers again over the past year.
- Revenue growth stabilized, attributed to overcoming pandemic-induced fluctuations and attracting new viewers with original hit shows.
2. The Expansion of its Advertising Business:
- Netflix traditionally relied on subscription fees for revenue but introduced a cheaper ad-supported tier in several markets.
- This move aims to attract budget-conscious consumers, compete with other ad-supported tiers from competitors like Disney+, HBO Max, and Paramount+, and diversify revenue sources.
- The article highlights the potential growth in ad spending on connected TV (CTV) ads in the U.S., which could benefit Netflix.
3. Crackdown on Shared Passwords:
- Netflix historically tolerated password sharing but implemented measures to address this in 2023, charging extra fees for shared passwords.
- The crackdown initially faced resistance but is expected to stabilize long-term growth by increasing revenues per household and potentially driving some users towards the ad-supported tier.
4. Stabilizing Operating Margins:
- Netflix's operating margins were impacted by investments in content and currency headwinds over the past year.
- The company anticipates an expansion of operating margins in 2023, reaching 18%-20%, driven by stabilized revenue growth, a weaker dollar, cost-cutting measures, and the growth of its higher-margin advertising business.
5. Valuation Concerns:
- Analysts project moderate growth in Netflix's revenue and adjusted earnings per share for the year.
- Despite positive performance, the article raises concerns about Netflix's valuation, noting that it trades at 28 times forward earnings and is still perceived more as a high-growth FAANG stock than a traditional media company.
- The risk is that if subscriber and revenue growth cools off, Netflix might face a reevaluation in the market, potentially being categorized with traditional media companies.
In conclusion, the article suggests that while Netflix's stock isn't considered cheap, its strengths in stabilizing growth, expanding the advertising business, addressing shared passwords, and improving operating margins outweigh concerns about valuation. The analysis positions Netflix as a leading player in the long-term growth of the streaming media market.
