Back in January, I speculated whether a significant fall in the Netflix (NASDAQ: NFLX) share price was worth capitalising on. Although tempted, I ultimately refrained from pushing the button. Had I done so (like this billionaire), I’d now be severely underwater. It’s down 64% in 2022 and 57% in 12 months.
Surely I must be willing to buy now that the stock has fallen further? Yes and no. Let’s start with the reasons to steer clear.
Worse to come?
A loss of 200,000 subscribers in Q1 wasn’t great news. The fact that this was so different from the 2.5 million Netflix planned to take on in those three months was the killer blow.
Things look likely to get worse as well. With inflation showing no sign of going away and people looking to cut costs where they can, the company has warned that it faces a further exodus of 2 million subscribers in the three months to July. Of course, it could end up being more than that, especially if any changes to its policy on password sharing are deemed too draconian. Netflix has estimated that over 100 million households watch the service in this way. The need to tread carefully can’t be overstated.
In addition to this, a few general concerns remain. These include the huge amount of competition the company faces from rivals. After all, there’s only so much content one person can realistically consume. Moreover, Netflix doesn’t have a diversified portfolio of assets in the way that Apple, Disney and Amazon do. Of course, not knowing whether a costly series or movie will be a success in advance is a worry that all of the above must endure.
Contrarian opportunity?
This is not to say I’ve now turned my back on Netflix stock. On the contrary, I reckon there are reasons still to like the US streaming giant. You don’t manage to achieve uninterrupted quarterly growth in subscribers since 2011 without doing something seriously right. As always, a lot depends on investors adjusting their expectations to reflect the new reality.
For now, it remains a market leader in what it does with over 220 million subscribers. This puts the predicted loss of accounts in Q2 into perspective. And its aforementioned rivals aren’t exactly immune from the threat of people ditching their services either.
There will come a time when inflation cools, potentially leading to a recovery in subscription levels. An ad-supported tier that’s competitively priced should also help. Personally, I’d like to see a focus on quality rather than quantity in terms of content.
Before then, some kind of resolution to the conflict in Eastern Europe could rekindle demand for the stock. The company’s decision to withdraw its services from Russia saw it lose 700,000 customers.
Keeping my powder dry
As a Fool willing to take a long-term approach to building my wealth, I remain interested in buying this former market darling at some point. Even so, I won’t deny that the investment case does look less attractive than it once did. The list of uncertainties is longer than it used to be.
The 64% fall in the Netflix share price in 2022 might look overdone, but it’s not wholly unjustified. And a recovery won’t happen overnight.
I’ll wait for the dust to settle.