A year ago, Netflix (NASDAQ: NFLX) was the most popular streaming service on the planet. The NFLX share price had soared to record highs, and the company's new offerings won critical acclaim.
Part of daily life for millions, its original shows like sci-fi horror Stranger Things and fantasy series The Witcher amassed a mighty following and become cultural icons in their own right.
But with competition from giants like Amazon (NASDAQ: AMZN), Walt Disney (NYSE: DIS), and Apple (NASDAQ: AAPL), its future is less certain.
Founded in California in 1997 by duo Marc Randolph and Reed Hastings, Netflix started life as an online DVD rental offering.
As technology moved on, the firm evolved into the online streaming behemoth we know today.
With the COVID-19 pandemic and so many stuck indoors looking for something to watch, Netflix grew ever more popular.
However, other companies started vying for their own slice of the streaming market. Competition is growing more and more fierce each day.
With the NFLX share price plummeting 77% since November 2021, despite a recent 40% rally, investors wonder if Netflix is still a sensible investment.
Fundamentals of Netflix stock
Netflix saw unprecedented 2020 membership growth due to the pandemic, contributing to impressive Q1 revenue in 2021. The figure hit $7.2bn, up 24% from $5.8bn the year before and from $6.6bn in Q4 2020.
Q1, 2022 saw sales of $7.8bn and Q2, $7.9bn. But both these figures missed analyst expectations.
Global streaming paid memberships hit 207.6 million in the first quarter of 2021, which had risen to 222 million by the end of the year.
However, streaming memberships began to slip in 2022, with the company losing subscribers for the first time in over ten years. This was enough to set alarm bells ringing and send NFLX stock plummeting.
Netflix attributes declining membership growth to increasing competition, rising consumer costs, returning to work (less time for streaming), and even password sharing.
The company's shares are trading at $233 at the time of writing, down 60% year-to-date. It has a $104bn market capitalization.
The price-to-earnings ratio, calculated by dividing the share price by earnings per share, is 20.8x. While the firm's price-to-sales ratio, determined by dividing the share price by sales per share, is 3.41x.
What is the bull case for Netflix?
Netflix has plenty going for it. As one of the original FAANG stocks – an acronym for Facebook (NASDAQ: META), Amazon, Apple (NASDAQ: AAPL), Netflix and Google – it has an impressive reputation.
Not only that, but the company makes its own content and has several marketable franchises. A survey from Cowen found that the company's original content is the biggest draw for subscribers.
Original content offers protection against competitors like Disney, which have been withdrawing their content from Netflix for their own platforms.
What is the bear case for Netflix?
Competition is one of the biggest concerns for Netflix right now as the so-called "streaming wars" rage on.
Amazon Prime now has over 200 million global subscribers. Although, admittedly, many are subscribed for non-streaming reasons – since Prime membership confers other benefits.
Disney+ is also on the rise, with 152 million subscribers already, despite a much shorter life.
Meanwhile, Warner Bros. Discovery will merge its HBO Max and Discovery Plus services into a single streaming platform as part of a plan to reach 130 million paying subscribers by 2025.
Discovery is a major in nature, science, and non-fiction titles. The combined company could be a serious Netflix challenger. It is expected to incorporate the existing CNN, HBO, and Warner Bros offering with Discovery's Animal Planet and Food Network.
And it's not just the worry of direct competition that the company has to worry about but also the dangers of an over-saturated market.
The firm's popularity stems from offering a large volume of content at a low price. But, if more and more big media organizations start their own services and pull their content from Netflix, this could diminish its offering.
The economy is experiencing sticky inflation, causing consumers to tighten their purse strings. This is also contributing to a decline in Netflix subscriber numbers.
The market may experience further consolidation as separate entities regroup to draw customers back in. There are already rumors Netflix would make an excellent addition to Apple's services and the tech behemoth has plenty of cash on hand to make an offer.
Should I invest in Netflix stock?
Some excellent reasons to invest are popular original content, a large subscriber base, and historically strong financial results.
Likewise, there are reasons it might not suit everyone. There's growing competition, an end to the Netflix-friendly environment of the pandemic, and subscriber numbers slipping.
The company's results and high-profile franchises certainly make it worth considering. But without a dividend yield, investors look for growth. The company is raising its subscription prices and adding a cheaper ad-powered tier, which may help boost the coffers.
There's plenty to love about Netflix, but the ongoing streaming wars could put some investors off.
Article updated: Aug 2022