The whole tech sector has been under pressure recently, but one notable loser has been Netflix, Inc. (NASDAQ:NFLX). Pretty much all hyper-growth tech stocks have been off over the past several trading days. But the drought in NFLX stock started much earlier.
NFLX stock hasn’t done much of anything since early October. After a massive run propelled the stock to just under $200, NFLX has dropped more than 5%.
In that same time frame, Facebook, Inc. (NASDAQ:FB) is up more than 1%, while Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) is up about 3%. Amazon.com, Inc.(NASDAQ:AMZN) is up more than 17% in the same time frame.
So you can’t blame the pain in NFLX stock entirely on general struggles in the tech space. The tech space has been doing just fine over the past several months. Not so with NFLX stock.
What is going on under the hood? Elevated competitive risks mostly. But even with bigger competition coming, NFLX stock is still a buy.
Here’s why.
Bigger Competition Is Coming for Netflix
Netflix pioneered and has subsequently dominated the streaming video on demand (SVOD) space.
But Netflix won’t run in open fields forever. Walt Disney Co (NYSE:DIS) is pulling all its content from Netflix and launching its own streaming service in 2019. Between Marvel, LucasArts, and Pixar, Disney has enough quality content to immediately compete with Netflix.
Apple Inc. (NASDAQ:AAPL) is also rumored to be getting into the streaming space, which would make sense since the company has recently found tremendous success in accelerating growth in its Services business. It would also make sense for Facebook to jump into this space, given its huge resources and 2-billion-plus user base.
Then there is the whole risk of net neutrality being a thing of the past. Net neutrality was an Obama-era implemented regulation that essentially forced internet service providers (ISPs) to treat all content and data on the internet equally. But the Trump administration wants to repeal net neutrality, and it looks like it will.
Doing so wouldn’t be great news for Netflix, who is at the mercy of ISPs treating it equally on the internet. ISPs will likely force Netflix to pay higher fees for higher speeds and show preference for its own streaming services. For example, AT&T Inc. (NYSE:T) could give higher data transfer speeds to its own DirectTV Now streaming service.
Netflix shouldn’t be affected by this too much given its huge size, but it nonetheless presents even more competitive risks to the NFLX growth narrative.
NFLX Stock Will Be Just Fine
Despite these elevated competitive risks, NFLX will be just fine.
The real loser here is traditional TV.
Cord cutting is still a very big trend. Consumers continue to shift en masse from traditional cable to over-the-top entertainment options. See the explosive growth of Roku Inc (NASDAQ:ROKU). Roku devices, alongside Google Chromecast and Amazon Fire TV Stick, were big sellers this Black Friday shopping period.
With the over-the-top entertainment space growing so rapidly, there is room for many players to succeed without rubbing elbows for a while.
Consumers will easily shuffle out $10 a month for Netflix, $10 a month for a Disney-branded streaming service, and $10 a month for an Apple-branded streaming service all at the same time. That is a total of $30 a month, still far less than the average cost of cable (more than $100 per month).
All Netflix has to do, then, is continue to prove out its distinct value from other streaming services. The way Netflix does that is through original content.
Netflix’s original content continues to be good and diverse. Recent originals Stranger Things 2, Punisher, and Mindhunter were all well-received by consumers. So long as Netflix’s original content pipeline remains strong, the NFLX stock price will trend higher. That is the benefit of being the leader in a secular growth market.
Bottom Line on NFLX Stock
At 150x earnings for what analysts see as 75% earnings growth over the next several years, NFLX stock isn’t unreasonably valued (the market trades at a similar premium to its growth potential).
Consequently, I don’t see any reason to sell here. Bigger competition is coming, but the over-the-top entertainment market is growing rapidly enough to accommodate multiple winners.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, and DIS.
