Netflix Stock Is Dead Money. Buy a Different Streaming Stock Instead


A few months back, I watched a movie on Netflix called Don’t Look Up. But the more appropriate phase for Netflix (NASDAQ:NFLX) stock investors right now is don’t look down.

An image of a phone with the Netflix logo on the screen, laying next to a container of popcorn with popcorn splayed across
Source: xalien / Shutterstock

Netflix stock crashed a jaw-dropping 35% yesterday after the streaming giant reported its first-ever subscriber decline in the streaming era. That equates to Netflix losing $50 billion in market capitalization in a single day.

But this isn’t just a one-day phenomenon. Over the past five months, the company has shed $200 billion in market cap. For all its supercharged pandemic demand, Netflix stock has now wiped out all the gains it saw during Covid-19. Indeed, the stock has now basically gone nowhere since early 2018.

Naturally, lots of investors are asking themselves right now: Should I buy Netflix stock?

After all, Netflix is still Netflix. This is the Silicon Valley hypergrowth darling that disrupted the way you and I watch TV shows and movies. Its service is in basically every home in America. Its movies are conversation-starters, and its TV shows are our latest addictions.

Yet, though all that is true, you should not buy Netflix stock today.

The growth story has peaked. The company’s best days are behind it. Over the next few years, Netflix stock will grow at a snail’s pace. And in fact, NFLX was so richly valued in late 2021 that even now, it’s still overvalued for snail-like growth.

But don’t take Netflix stock’s failure as a warning sign for the rest of the tech sector. It’s not. Netflix’s problems are endemic to Netflix. The rest of the tech sector — including many other streaming TV providers — are thriving right now.

So… what’s the investment implication?

Forget Netflix stock. It’s dead money. Instead, pay attention to another TV-streaming stock that’s pulling folks away from Netflix.

Where Netflix Stock Went Wrong

At this juncture, a lot of investors are probably asking themselves where Netflix went wrong. How did things get this bad? After all, you don’t go from adding millions of new subscribers every quarter for several years to losing 2 million subscribers in a quarter without a few missteps.

So… what were those missteps?

Frankly, Netflix got complacent while the rest of the TV-streaming playing field caught up to it.

To be clear, Netflix has a history of innovation. The company was the first to pioneer subscription DVD mail services. Those were a huge hit. Then, once the shift to internet TV emerged, Netflix was first to launch a TV-streaming service. No doubt, Netflix streaming is a huge hit. Once it faced competition from Amazon Video, the company began aggressively investing in and creating original content. And that original content has been a huge success.

But the original content pivot really took off in summer 2016 with Stranger Things. What has Netflix done since then?

Screenshot of English version of Netflix running on TV UI.
Source: Netflix

The company has upgraded the viewing quality, I guess. They’ve made some foreign content. They’ve tested games and interactive content.

Don’t get me wrong. I loved Squid Game. But foreign content, enhanced viewing quality and some half-baked interactive movies don’t constitute breakthrough innovation. So, over the past six years, Netflix has gone without a single breakthrough innovation. Instead, it’s elected to ride on the coattails of original content.

But concurrent to Netflix’s exclusive reliance on original content, many other media companies launched streaming services with original content, too. Take HBO Max, Disney+, Apple TV+, Roku Channel.

The Company’s Complacency

Over the past five years, all new entrants to the TV-streaming space years have all have developed original content.

The playing field has been leveled. As a result, Netflix has gone from spreading like wildfire to fighting tooth-and-nail to keep subscribers on its platform.

It’s an ugly situation — and one that Netflix stock still isn’t priced for…

Of course, the solution here is for Netflix to finally pioneer a new breakthrough innovation. Maybe it’s VR content. Maybe it’s the ad-supported tier that Reed Hastings is suddenly open to developing. Maybe it’s teaming up with a video game developer.

I don’t know what it’s going to be. But I do know two things. One, Netflix will do something (it’s in its DNA). And two, it will take a few years for that “something” to be developed, gain traction, and re-accelerate the growth narrative.

In the meantime, Netflix stock is dead money.

However, that does not mean that all tech or TV-streaming stocks are dead money, as the market seems to think. While TV-streaming stocks were crushed Wednesday in sympathy with Netflix, our data suggests those providers are thriving as Netflix falters. This is creating what we believe is a super compelling buying opportunity in one TV-streaming stock.

Not Symptomatic of “Subscription Fatigue”

The market is concerned that Netflix’s “peak growth” is symptomatic of a broader growth phenomenon across all digital companies that benefited from pandemic-fueled supercharged demand. Consequently, all digital media and tech stocks struggled yesterday, while the rest of the market powered higher.

The data, however, disagrees with this idea of “peak growth” in the digital world.

Our data checks strongly suggest that Netflix’s “peak growth” problem is specific to Netflix. It’s not indicative of slowing digital engagement trends broadly.

Specifically, according to analytics firm Semrush, Netflix’s web and mobile app traffic numbers plunge in the first quarter of 2022. See the chart below.

However, that plunge did not happen anywhere else. Related TV-streaming platforms Roku (NASDAQ:ROKU), Hulu, and HBO Max saw web traffic improve in that timeframe, both sequentially and year-over-year. Those improvements extended into media-streaming platforms like Spotify (NYSE:SPOT) and online dating platforms like Tinder and Hinge. Social media platforms like Snap (NYSE:SNAP) excelled, too.

In other words, our analysis suggests that yesterday’s broad tech sell-off in response to Netflix’s awful quarterly earnings is overdone. The market’s panicking, worried that “peak Netflix” is symptomatic of “peak digital.” It’s not. Netflix is just dealing with its own host of problems, like escalating competition, household saturation, password sharing. And most of all, as described above, it’s suffering from a lack of innovation.

So… what’s an investor to do with this information?

Forget Netflix stock. It’s dead money. Instead, look for opportunity in Netflix’s collateral damage. Look at Disney stock. Look at Roku stock and Spotify stock. And above all else, look at one tiny TV-streaming stock that may be the biggest reason Netflix is losing eyeballs.

The Final Word on Netflix Stock

Netflix is great. I love the service. I love the company. And I’ve loved the stock.

But in our flagship investment research advisory, Innovation Investor, we’ve avoided buying Netflix stock for over a year now. That’s mostly because, despite our bullishness on the TV-streaming industry, we always felt Netflix was closer to the final innings of its growth narrative than the first.

And we like to invest in stocks in the first few innings of their growth narratives. Those are the ones that have yet to truly take off and make their early investors millionaires.

That’s why in our portfolio, we passed on Netflix. Instead, we’re pounding the table on another smaller, much earlier-stage and faster-growing TV-streaming stock that could be “the next Netflix.”

So, if you missed out on buying Netflix stock back in 2013, this could be your second chance.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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