After a two-month swan dive climaxing in an earnings miss, Netflix (NASDAQ:NFLX) has bounced back. Shares of NFLX stock that traded as high as $690 in November fell to just $366 after a disappointing earnings report. Netflix said its global subscriber count rose just 9% in the fourth quarter of 2021 after jumping 22% the previous year. Margins and net income also dropped.
However, an upgrade from Citigroup from neutral to buy — and a purchase of $20 million in shares by CEO Reed Hastings — had Netflix opening for trade on Feb. 2 at about $448 per share. Now investors are asking whether the bears had it right or if there’s still a bull case to be made for NFLX stock.
Here’s what you should know about this stock moving forward.
The Bull Case for NFLX Stock
Citigroup’s note lowered its one-year price target on Netflix shares from $595 to $450 per share. However, it also said other analysts are underestimating the company’s pricing power. Netflix is raising its base price by about 10%. The basic plan will now cost $9.99 per month. Further, the standard U.S. plan now costs $15.49 per month.
On top of this, Bill Ackman’s hedge fund also recently bought 3.1 million shares of NFLX stock worth over $1 billion. Ackman believes the company still has room to grow. Still, the main argument being put forward is that profits are going to jump. That Netflix is becoming a value stock.
Netflix is not yet a value stock, however. With a market capitalization of around $200 billion, its price-earnings (P/E) ratio is currently 38.5 according to Seeking Alpha. Analysts expect earnings to jump 30% next year to $14.23 per share. That’s still a P/E of around 30. Plus, Netflix doesn’t pay a dividend.
The Bear Case
Essentially, the bear case here is that paid streaming has peaked. Many now expect that a crash is imminent.
The market that Netflix pioneered now has competition from ViacomCBS (NASDAQ:VIAC), Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA), Disney (NYSE:DIS), Apple (NASDAQ:AAPL) and others. A cable subscriber who goes to streaming today can easily pay more than they used to when Internet costs are factored in.
That makes the latest price increase strategic. Netflix is pushing consumers to make choices, a choice between a system they know with content they love and unknown competitors. As I’ve said before, the gating factor to streaming isn’t money but time. Because streaming offers everything a provider has, you may not need more than one.
You may not even need to pay. For example, Alphabet’s (NASDAQ:GOOGL) YouTube doesn’t buy its content but had $8.6 billion in ad revenue during the most recent quarter, up 25% from a year ago. Netflix’s quarterly revenue came to $7.7 billion, up 17% year-over-year (YOY).
So, has streaming hit a tipping point? After all, Alphabet and social media companies like Meta Platforms (NASDAQ:FB) and Twitter (NYSE:TWTR) don’t pay a dime for content. They don’t have to.
What’s more, time spent gaming also continues to rise. In 2021, it hit an average of 16.5 hours per week. For 2020, one survey showed that Americans spent about 13 hours per week on media.
The Bottom Line on Netflix
Netflix is aware of the gaming threat. In fact, it’s in the process of launching a gaming service.
Still, even this may not be enough for NFLX stock. The pending Microsoft (NASDAQ:MSFT) purchase of Activision Blizzard (NASDAQ:ATVI) points toward a future where gaming, media and virtual reality (VR) collide. That’s why Facebook changed its name and is putting billions upon billions into its capital budget this year. Netflix is expected to spend $17 billion on new productions this year as well. That is up 25% YOY.
Everyone in the entertainment universe is being squeezed — by rising budgets, by competition and most importantly by time. Assuming victory by any player or technology at this point seems premature. The game has just begun.
On the date of publication, Dana Blankenhorn held long positions in AMZN, MSFT, GOOGL and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.
