We are just over nine months away from 2022, and Netflix (NFLX -2.69%) shares are down 62% for the year. For a stock that produced a remarkable 6,000% return from early 2012 to late 2021, this is a rude awakening.
The streaming industry is becoming hyper-competitive, a fact that management can no longer ignore. Additionally, Netflix itself is undergoing a major strategic shift in an effort to spur growth once again. Should investors buy the best streaming stocks today? Let’s take a closer look.
Netflix has had a rough time in 2022, losing a total of 1.2 million subscribers in the first six months of the year. This is a far cry from the massive client additions that investors have grown accustomed to seeing in recent years. And, unsurprisingly, revenue growth has slowed dramatically. Sales of $8 billion in the second quarter were up just 8.6% year over year, the slowest pace in at least the last nine years.
I truly believe that this change is due to one key factor: intense competition for consumers’ eyeballs. With a seemingly limitless amount of streaming options on the market, Netflix is no longer the only game in town, not to mention all the other entertainment options people have that don’t involve looking at a screen.
The company will announce third quarter financial results on Tuesday, October 18. Management expects the company to grow revenue by 4.7% year over year and forecasts 1 million net new subscribers. A strong performance will certainly support a higher share price.
Despite recent headwinds, Netflix’s global opportunity remains huge. There are currently approximately 800 million broadband households worldwide (excluding China, where Netflix is not offered), a figure that can be viewed as Netflix’s total addressable market. With 221 million subscribers today, there is still a huge growth opportunity ahead.
It’s starting to look like Netflix’s most mature markets, the US and Canada, are saturated, with these two countries losing a total of 1.9 million members in the last two quarters. Therefore, international markets will be the key factor in attracting more customers. The Asia-Pacific region, in particular, is the fastest growing segment for Netflix, adding nearly 7 million subscribers in the last four quarters.
To boost the company’s prospects, management earlier this year announced plans to introduce a cheaper, ad-supported subscription tier. Reed Hastings, co-founder and co-CEO of Netflix, long rejected this idea because he thought it would damage the brand and the consumer experience. But with growth hitting a wall and increased competition in the industry, this seems like an obvious strategic move.
The company believes that some 40 million accounts will sign up for this option by the end of Q3 2023. But no doubt some customers who pay for the ad-free version will switch to the lower-cost option, so it’s hard to identify. the opportunity for incremental income. Partnership with tech giant Microsoft In this effort, Netflix will make its ad-based subscription option available in select markets beginning in November.
Netflix’s gaming boost is also worth mentioning. While the company wants to bring more games to market to increase the value proposition of being a Netflix subscriber and has bought several studios to help this initiative, games have not yet moved the financial needle.
After reaching an all-time high closing price of $692 last November, Netflix shares fell 67%. And as a result, the stock currently trades in hands at a P/E ratio of less than 21, which is about as cheap as it has been at any time over the last decade. This simple metric indicates an attractive entry price.
However, looking at Netflix earnings might not be the right approach to valuation. This is because the company spends huge amounts of cash on content (more than $17 billion in 2021), which makes accounting profits meaningless. Therefore, the selling price (P/S) multiple might be more appropriate in this situation. Currently, the P/S ratio is 3.4, about half the average of the last 10 years. Again, this shows us that Netflix stock is cheap by historical measures.
It certainly looks like the monstrous growth that investors have been hoping for from Netflix over the past decade is coming to an end. But that doesn’t mean it’s time to ditch stocks. In fact, the business, which has long been a cash-burning machine, is poised to generate sustainable positive free cash flow, starting this year. Add this to an undemanding valuation, and investors should consider buying shares in the streaming pioneer now.