Netflix (NASDAQ:NFLX) stock, the cover girl of the latest tech wreck, is getting interesting again.
The stock has lost 70% of its value in 2022. The five-year gain on Netflix is now just 13%.
What’s most bullish about Netflix is that, under pressure, the unthinkable has become thinkable. The arrogance that marked the company when it claimed dominance over streaming is gone. Consumers are certain to benefit. The question is whether shareholders might, too.
While an ad-supported tier wouldn’t bring the stock back to the heights, it could mean more revenue and a bump for shareholders. So could a single hit game or a big merger. Many things are now possible.
Madison Avenue Save Us
NFLX stock crashed after its audience peaked and it missed earnings estimates. Net income of $1.6 billion, $3.53/share fully diluted, and revenue of $7.9 billion weren’t the problem. The problem was that the number of subscribers dropped, by 200,000. I blamed its exit from Russia, which cost 700,000 subscribers. But in the U.S. and Canada, it lost 640,000 subscribers. The only region showing gains was the Asia-Pacific region.
Netflix’ image also took a hit. Its crackdown on password sharing made enemies of some customers. Top shows and movies are showing their age. The company, once known for anticipating viewers with movies like Bird Box, is now watching rivals like Walt Disney (NYSE:DIS) and, most ominously, Amazon (NASDAQ:AMZN) steal the buzz.
This made what once seemed unthinkable, a lower-cost tier subsidized by advertising, look attractive. There is even talk of buying Roku (NASDAQ:ROKU), the streaming equipment company. That stock has also fallen hard. Roku opened June 23 with a market cap of $12.4 billion.
The most persistent rumors involve a tie-up with either Alphabet (NASDAQ:GOOGL)’s YouTube or Comcast’s (NASDAQ:CMCSA) NBCU. Analysts estimate an ad-based tier could boost revenue by 21%, bringing its run rate to $40 billion/year.
While Netflix is big enough to swallow Roku, Comcast and Google are big enough to swallow it. Any deal would face anti-trust scrutiny, but any announcement would also provide a gain to Netflix shareholders.
Layoffs, Games and NLFX Stock
There are other ways to deliver gains to investors.
Netflix laid off 150 people in May, from a workforce of 11,000, and will lay off about 300 more soon. Layoffs always hurt the laid off, but they also have a galvanizing impact on those who are left, and they leave management with fewer bills to pay.
Netflix has also gotten into gaming. It bought three gaming companies in the last year and is creating games around shows like Stranger Things. It charges from $10 to $20/month for its gaming service, supported by its global content network, which caches content close to subscribers, sometimes in internet providers’ offices.
Gaming, like other forms of entertainment, is built around hits. If Netflix did have a hit game, it could capitalize on the success quickly.
The Bottom Line
NFLX stock is still not cheap, but the price now looks reasonable. You’re paying roughly 2.5 times the last year’s revenue and just 16 times earnings to own it.
There are also lots of potential catalysts for earnings growth. An ad-supported Netflix would still not be free. It could bring in new subscribers who then might upgrade, although the risk is some current subscribers might downgrade.
The potential of gaming isn’t recognized by most analysts, but the content delivery network Netflix built for its current business gives it a good platform there.
Finally, there’s the chance of a big merger. A Roku deal, especially done for stock, would immediately add to earnings and solve the advertising problem. A sale to Comcast or Google would solve everything.
I would seriously consider buying Netflix here.
On the date of publication, Dana Blankenhorn held long positions in GOOGL and AMZN. 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 firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack.