It wouldn't be an easy task to find a stock that has performed better than Netflix (NFLX 1.67%) has over the past decade. The leading streaming-service business has generated a fabulous return of over 2,500% since January 2012 compared to the S&P 500's return of just 228%. Growing the customer base, which now sits at 221.8 million, has been key to Netflix's booming success.
But when the business reported its fourth-quarter 2021 financial results last week, investors sent the stock tumbling more than 20% the next day. The main culprit was management's disappointing guidance of just 2.3 million subscriber additions in the current quarter, far less than Wall Street's expectation of 6.9 million.
Image source: Getty Images.
In light of the drastic downward stock price movement, now might be a great time to consider the bull and bear cases for Netflix. Let's look at both sides of the investment argument for this top streaming stock.
The bears point to market saturation and increased competition
For a long time, Netflix was the only game in town when it came to the streaming market. And because of having zero direct competition, the business rapidly grew its user base. According to the bears, however, the tables have turned. There are a vast number of streaming options out there, including Amazon Prime Video, Walt Disney's Disney+, and AT&T's HBO Max. Smaller, newer entrants like ViacomCBS' Paramount+ and Comcast's Peacock give viewers even more choices.
The U.S. and Canada appear to be reaching saturation, having added just 1.3 million net new subscribers in the past year. As a result, the bears argue that the only way for Netflix to meaningfully increase revenue stateside is by occasionally raising prices, something Netflix management actually just announced. But this strategy could alienate price-sensitive customers who can go with cheaper streaming options.
And even abroad, Netflix's growth isn't a sure thing. In India, for example, the company is trying to catch up to established players like Amazon Prime Video and Disney's Hotstar. In December, Netflix slashed prices significantly in the South Asian nation in an effort to attract more viewers.
With a much more crowded streaming market, Netflix will also need to continue spending tens of billions of dollars each year to produce new shows and movies. This is a required investment to bring in more members and to keep existing ones engaged. Entering the mobile gaming space can help, but Netflix has no experience in this entertainment category.
Bears have a ton of momentum right now after Netflix's weak Q1 2022 guidance.
The bulls believe the long-term opportunity hasn't changed
While Netflix has no doubt experienced slower growth than investors are used to, and particularly after the pandemic surge in 2020, proponents of the stock still see a major opportunity for the company to dominate the world of video entertainment.
At its peak, the U.S. had 105 million cable-TV households in 2010. To be fair, not all of them will become Netflix customers, but it shows you that there is still some untapped potential domestically. And when it comes to price increases, Netflix's management has historically done a fantastic job of executing. In fact, CFO Spence Neumann highlighted on the Q4 earnings call that the leadership team continues to see improved member churn and engagement. I don't think they'd raise prices if this wasn't the situation.
The weak guidance for the current quarter certainly spooked the market, but according to management, it's simply the result of an uneven and difficult economic recovery in light of the ongoing pandemic. The weakest region in the latest quarter was Latin America, adding only 1 million subscribers. While it's easy to assume that all parts of the world received the type of government stimulus we did here in the U.S., this just isn't true in developing regions. Consequently, consumers in these still-strained economies aren't prioritizing a streaming subscription right now.
Focusing on and continuing to develop competence in creating insanely successful international hits produced in local languages, like Squid Game and Money Heist, give Netflix a major advantage. And it's still growing in every one of its regions across the globe. "No structural change in the business that we see," Neumann mentioned on the earnings call.
Bulls are keeping their eyes on the bigger picture, understanding that Netflix's massive long-term opportunity remains intact.
