Although content-streaming service Netflix, Inc. (NASDAQ:NFLX) is enjoying a robust 2017, questions are now surfacing about its viability. For instance, the NFLX stock price today is recovering from yesterday’s 4.7% decline. At the time, the markets were digesting the latest headline from the rapidly declining North Korea situation. Still, this was the second-worst single day performance for Netflix for this year.
As is usually the case for a hard-charging asset, investors are leery of a sudden correction in the NFLX stock price.
Year-to-date, shares have already gone up over 44%. Despite the recent loss in the markets, Netflix exceeds the YTD performance of its so-called “FANG” peers of Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL). Compared to Amazon and Google, the discrepancy is quite large.
The whole idea of winning on Wall Street is to buy low and sell high. Basically, if you had invested at any point prior to July of this year, you are still profitable based on the NFLX stock price today. That just makes the nearer-term bearish argument stronger.
Moreover, Netflix’s recent selloff occurs at a time when its competitive landscape became fiercer. No longer are they the lone content streamer. Now, Amazon, Walt Disney Co (NYSE:DIS), and Time Warner Inc (NYSE:TWX), to name but a few, have their own variations of subscription-service TV. If NFLX stock is to continue driving excellent returns, it has to prove it can handle the competition.
Bull and Bear Case for NFLX stock
But InvestorPlace feature writer James Brumley is not holding his breath. As Brumley points out, Netflix started life as a groundbreaking innovator. From its DVD-lending days to delivering content through the internet, Netflix pioneered new industries. Rivals couldn’t compete with it because there was nothing to compare it too.
Unfortunately, the novelty of streaming content wore out. With big names forwarding their own services and original content, it’s getting harder for Netflix to stand out. According to Brumley, the company has become commoditized, which is a death sentence for innovators. Essentially, nothing special exists anymore about Netflix’s core business, which is immediately concerning for the NFLX stock price.
The other argument is that Netflix is spending excessively in order to maintain their edge. Long-term debt has exploded rapidly since 2012. Also, operating and free cash flow sunk deeply into the red during the aforementioned time frame.
If Netflix CEO Reed Hastings gets it right, then he looks like the genius many already consider him to be. But if he underestimates his competition, or overestimates his ability to overtake the headwinds, NFLX stock could pay the price.
On the other side of the equation, InvestorPlace’s Tom Taulli states that Netflix is the “leading internet television network, with 104 million subscribers across 190 countries.” That subscription number could be over 100 million just counting the international market in less than three-years time. Whatever competition exists, it’s not denting consumer enthusiasm.
Furthermore, Taulli argues that Hastings has the Midas touch that facilitates future success. “Like AMZN’s CEO Jeff Bezos, Hastings takes a long-term view of things and also has an obsessive focus on the customer. So, it should be no surprise that Hastings continues to double-down on his business.”
In other words, go short NFLX stock at your own risk!
Netflix owns the Future of Entertainment
But with shares potentially at a crossroads, how should investors react? While I respect the risks Brumley forwarded, my current view is that it’s too early to cast doubt on Netflix.
As noted by Taulli, a big advantage that Netflix has is the strength of its original content. Immensely popular shows, such as “Orange Is the New Black” and “House of Cards,” demonstrates Netflix’s growing industry credibility. As traditional TV loses viewership, Netflix will likely fill consumers’ entertainment needs.
In addition, we can’t neglect the value proposition. Even with price hikes over the years, consumers get incredible mileage out of their dollars, especially compared to satellite TV. The basic rate starts at $8 per month, and the premium is a measly $12.
Furthermore, Netflix has an impressive library of international content. While the alt-right may be up in arms about demographics, we’re turning into a more cosmopolitan nation. Thus, the company serves a diverse range of entertainment options for a consumer base that’s also increasingly diverse. While this dynamic may not impact shares now, it surely will 20 years down the road.
While it’s tempting to take profits based on the NFLX stock price today, long-term investors instead have an opportunity. The rising number and magnitude of the competition is definitely worrying. However, Netflix has handled previous challenges superbly. At this crossroads, I’m willing to give it a fair chance.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
