Netflix‘s (NFLX -1.78%) stock prices are down about 60% this year and erase nearly four years of gains. The bulls fled as the video streaming giant’s subscriber growth stalled and its operating margins declined. Challenging comparisons with pandemic-era growth, intense competition and rising interest rates further exacerbated the sell-off.
But after that painful loss, Netflix stock has historically looked cheap at 21 times earnings. Could this struggling stock make a big comeback anytime soon? Let’s review the case of the bear and the bull to decide.
What will the bear tell about Netflix
The Bears believe Netflix’s heyday is over. Over the past few years, formidable competitors such as Walt Disney (DIS -3.20%), Amazon, Apple, Warner Bros Discovery (WBD -1.37%), Paramount Global (PARA 0.47%)and Comcast (CMCSA -3.62%) has saturated and carved out the video streaming market.
Netflix’s paid subscriber count rose 22% to 203.7 million in 2020 but only increased 9% to 221.8 million in 2021. That ended the second quarter of 2022 with just 220.7 million paid subscribers. Disney ended its last quarter with 221 million subscribers across all streaming services (Disney+, Hulu, and ESPN+), representing 27% growth from a year earlier. Therefore, the number of Disney streaming subscribers now surpasses that of Netflix.
To keep up with Disney and other competitors, Netflix needs to license more content and produce more original shows and movies. Therefore, operating margin is estimated to decrease from 20.9% in 2021 to around 19%-20% this year. As Netflix struggles to gain new subscribers and increase its spending, analysts expect its revenue to grow only 7% this year as revenue falls 10%.
That sluggish growth rate makes Netflix more comparable to traditional media companies than emerging tech giants. Yet Netflix has not been valued like traditional media companies. Disney has a forward-looking price-to-earnings ratio of 18, while Comcast and Paramount are trading at eight and 10 times forward earnings, respectively. Therefore, Netflix shares can still be overvalued with earnings of more than 20 times.
In the long term, Netflix management believes that the company can gain more subscribers by rolling out a cheaper ad-supported tier. However, most of its competitors — including Disney, HBO Max WBD, Paramount+, and Comcast’s Peacock — have beaten it with similar ad-supported platforms. Additionally, ongoing macro bottlenecks could make it difficult for Netflix to generate sufficient ad revenue to offset those lower subscription fees.
What will the bull say about Netflix
The bulls believe that streaming racing is not a zero-sum game. There’s still plenty of room for Netflix, Disney, HBO Max, and more to thrive without stepping on each other. Netflix can also continue to produce surprising hits — like Stranger Things, Squid Gamesand Bridgerton — by tweaking its AI algorithms to create fresh, original content.
Investors should also keep in mind that Netflix is more profitable than newer streaming challengers. For example, Disney’s direct-to-consumer segment, which houses its streaming service, posted a staggering $2.54 billion operating loss in the first nine months of fiscal 2022, which more than doubled its $1.05 billion operating loss a year earlier. . Hence, Netflix’s growth may cool off, but its early mover advantages, scale, and established original content lineup can help it hold off its challengers while generating significantly higher profits.
Netflix hopes to end two straight quarters of consecutive subscriber losses, caused in part by the Russo-Ukrainian war, by gaining about a million subscribers by the third quarter of 2022. That stabilization could provide a solid foundation for launching its ads. -supported rate this November.
If the launch coincides with a broader recovery in the ad market, which has been under pressure for most of the year, Netflix’s growth could accelerate again in 2023. Analysts expect the recovery to be moderate, with 8% revenue growth and 7% revenue growth. . , but could easily overturn those conservative estimates if it launched a new hit show, gained more subscribers, and attracted lots of passionate advertisers to its platform.
Which argument makes more sense?
Netflix isn’t going to be obsolete anytime soon, but its high-growth days are likely to be over. Its growth could stabilize after rolling out the ad-supported tier, but the ratings already reflect the potential for that increase. Simply put, I don’t expect Netflix’s stock to drop any further, but I also don’t think it will bounce back to its all-time high any time soon.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions at Amazon, Apple, Walt Disney, and Warner Bros. Discovery, Inc. The Motley Fool has positioned and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends Comcast and Warner Bros. Discovery, Inc. and recommends the following options: long calls January 2024 $145 at Walt Disney, long calls March 2023 $120 at Apple, short calls January 2024 $155 at Walt Disney, and short calls March 2023 $130 calls at Apple. Motley Fool has a disclosure policy.