It has been an absolute blood bath in the tech sector ever since Facebook (NASDAQ:FB) spooked investors with a weak guide and lost more than $100 billion in market value in a single day. Since then, the NASDAQ-100 has shed 4%.
Facebook has obviously led the sell-off. FB stock is down more than 20% since its bad earnings report. But, another stock that has been killed in the wake of the Facebook report is streaming giant Netflix (NASDAQ:NFLX). NFLX stock has shed 6% in just a few days.
Why has NFLX stock been so weak? A few reasons.
Netflix’s most recent earnings report wasn’t up to par. Thus, when the whole tech sector rolls over, NFLX investors don’t have a strong recent earnings report to fall back on. Plus, competition is building. Namely, traditional retail giant Walmart (NYSE:WMT) is getting serious about launching a competing streaming service.
Oh, and NFLX stock is trading at 125X forward earnings, versus a market-average forward multiple of 16. Thus, any perceived weakness in the Netflix story will result in big weakness in NFLX stock.
Despite all this near-term noise, the long-term growth narrative surrounding Netflix’s global growth narrative as the world’s leading streaming service remains intact. Thus, as near-term sentiment problems plunge NFLX stock back into reasonable valuation territory, long-term opportunities will present themselves to investors who are looking for big gains in a multi-year window.
Here’s a deeper look.
Netflix’s Near-Term Headwinds Have Merit
Netflix is staring at a plethora of legitimate headwinds over the next several years, most of which are from increased competition. In short, Netflix proved that over-the-top entertainment distribution is the future, and now everyone and their best friend wants a piece of the pie.
Amazon (NASDAQ:AMZN) already owns a piece of the pie. But, Amazon is pumping a bunch of money into original content and also reworking Prime Video’s interface, so the Amazon competitive threat is only growing. Meanwhile, Disney (NYSE:DIS) is set to launch a streaming service in 2019. Considering a healthy portion of Netflix’s most watched content is Disney content, this streaming service will provide a huge competitive headwind on the content front.
Most recently, Walmart is planning on jumping into the streaming game. Instead of betting on quality original content, Walmart appears to be betting on its core strategy of winning on price. According to the Wall Street Journal
, Walmart’s new streaming service will be significantly cheaper than Netflix.
Put it all together, and the competitive landscape for Netflix is getting more intense. Netflix will struggle with Disney on “who has the best content”. They will also struggle with Walmart on “who has the best price”.
Fears regarding these headwinds have controlled sentiment recently, and NFLX stock has dropped. But, this weakness is not permanent.
The Long-Term Growth Narrative Remains Promising
Despite rising competitive threats, Netflix’s long-term growth narrative remains promising, and the outlook for NFLX stock to head significantly higher in a multi-year window remains strong.
Here’s the thing about streaming services. They are dirt cheap. Netflix is just over $10-per-month. The alternative, cable, costs $100-per-month.
Thus, consumers can afford to adopt multiple streaming services side-by-side, and still win on price relative to cable. For example, I could subscribe to YouTube TV ($35-per-month), Netflix ($11-per-month) and Disney Streaming (presumably $8-per-month), and still have a total cost ($54) about half as much as cable.
This is the future. Consumers will bundle multiple over-the-top streaming services to create a personalized viewing palette. In this sense, many streaming services can win side-by-side.
The reason to own NFLX stock is that Netflix will be in almost all of those streaming bundles. Netflix is the king of streaming not just because they have the best interface and the most content, but they also have really good original content which cannot be watched anywhere else. Presumably, Walmart won’t develop this original content (I’m not sure I see Walmart successfully making original movies). Disney will do this, but they also make a ton of money from theatrical wide releases. Thus, it is unlikely they do exclusive streaming launches all that often.
Because of this original streaming content moat, Netflix has secured for itself a bright future in the streaming world. In that world, Netflix’s subscriber base could easily get to 350 million members over the next several years, while price hikes will push revenue growth above user growth and pull margins higher. Overall, I still see NFLX stock as being worth around $345 today.
Bottom Line on NFLX Stock
Considering the company’s growing competitive threats, I’m not rushing to buy Netflix stock above fair value.
But, as competition headwinds drag on sentiment, I will look to buy NFLX stock as it drops below fair value. Right now, I think that fair value is around $345. Thus, any dips toward the $330’s should be viewed as long-term buying opportunities.
As of this writing, Luke Lango was long FB, WMT, AMZN and DIS.
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