On-demand video streaming services have changed the way we watch television. Netflix is a behemoth in this specific market. It has become a household name that invokes excitement due to its large collection of content that varies from binge-worthy originals to classic flicks. Nevertheless, while its rise as one of the most reputable tech companies in the world is a noteworthy feat, it has its fair share of issues. This explainer looks at the pros and cons or advantages and disadvantages of investing in Netflix stock.
Netflix and Chill or Netflix and Thrill? Pros and Cons of Investing in the Streaming Giant
Pros: Advantages of Netflix Stock
Netflix is one of the largest video streaming service providers in the world. It has more than 220 million subscribers which provide it with billions of annual revenue. The company has planned to expand its business and improve further its earnings through international expansion, partnerships with other production outfits, strategic investments, and pursuit of multiple income streams. These suggest a promising long-term investment opportunity. The following are the specific advantages of Netflix stock:
• Advantages of Large-Cap Stock: The company has a market capitalization of more than $120 billion. Its stock has the same advantages as other large-cap stocks, including higher potential for stability, an established business model and strong management capabilities, availability of market information, and higher liquidity.
• Strong Historical Financial Standing: Netflix has been acknowledged for having a solid financial standing. It has a strong balance sheet, positive cash flows, and a good credit rating. These characteristics demonstrate good financial management and make buying its stock a relatively safe investment option.
• Continuous Expansion of Business: It has a growth strategy that revolves around attracting more subscribers and improving its earnings. Part of this strategy is to produce original content, expand its content library, partner with regional producers to appeal to regional markets, and create multiple revenue streams.
• Diversification of Revenue Streams: Another advantage of investing in Netflix stock is the long-term potential of its current pursuit to create multiple streams of income. It earns primarily through subscriptions but has since launched its advertising-based revenue model. It also earns from licensing fees and merchandise sales.
Cons: Disadvantages of Netflix Stock
The price of Netflix stock was trading around $8.89 per share in January 2010 and it experiences its first double-digit growth in the same year. The stock price was around $63.11 in January 2015 and it entered the consistent $100 beginning in October 2016. The company ended 2022 with a stock price of $294.88 per share. The drastic increase in its stock price makes it a growth stock. However, considering specific price fluctuations on a day-by-day or week-by-week basis, it is considered volatile. The following are the disadvantages of Netflix stock:
• Overvaluation and Price Volatility: Several analysts noted that the price of its stock may be overvalued relative to its earnings potential. Others are specifically concerned that it has become a speculative stock rather than a growth stock. These explain why its price tends to be volatile over a short period.
• Emerging Sell Play Recommendation: A few analysts have also recommended that Netflix is not a growth play or a value play but more of a sell play. This means that investors are advised to close their long-term position in its stock due to the risk of a price decline stemming from its slowed-down growth.
• Specific Content Production Issues: The company has been focusing on producing original content and securing exclusive distribution rights. But these endeavors are expensive. Its high content cost may impact its profitability. There is also an issue about its overdependence on a small number of content.
• Competition and Market Saturation: Another disadvantage of Netflix stock is that its drastic growth might have plateaued due to the existence of other streaming services from Amazon, Apple, The Walt Disney Company, and HBO. The market is becoming saturated and some fear that its subscriber growth would slow down.
• Notable Business and Operational Issues: The company has been criticized for its password crackdown. Some of its subscribers have complained about the cancellation of original series and the removal of several titles in its content library. It also faces regulatory risks and potential bans in other countries.