Could Netflix Be a Buy After a 40% Stock Drop?

Welcome to latest Motley Fool Scoreboard. I'm Anand Chokkavelu and we've got long-time Fools, Jason Hall and Rick Munarriz, giving a 1 to 10 rating to a traditional Fool favorite uh that's near its 52-week low as we tape. It's Netflix, ticker symbol NFLX. We're going to determine if it's a good time to maybe buy buy some shares. Uh we'll start with the strength of Netflix's business, including factors like industry and competition. 10's invincible, a one is hopeless. Both of you have eights, Rick. >> Yeah, so did late fees stemming from a Reed Hastings video rental of Apollo 13 birth Netflix more than two decades ago? No. No. Uh that's been largely uh debunked as PR uh smoke. However, uh Hastings and his team did create uh this great localized distribution system for DVDs that shocked the world uh with 180-degree turn uh into streaming almost 20 years ago. Uh with roughly 325 million paying subscribers worldwide, it's a leader with scalability advantages. I like invincible most, I cannot lie, uh but it's still a very competitive market. >> Yeah, so I think the interesting thing to me about Netflix is this is a business that started out as a disruptor in video rental, disrupted itself with its shift to to to streaming, but also made another massively disruptive move with its shift away from buying other people's content to building its own content and taking on a massive amount of new risk. And it's been successful everything every time it's done that. That's the reason I give it an eight, but it is potentially trending lower. It's one thing when you're in the driver's seat of that content trend bus, but people are going to other bus stops, short-form content, uh so many different ways that people are consuming content. Can Netflix do a fourth act? Time will tell, but I do think the company's in the right hands to be able to continue to chase where customers are going. >> I choose to believe that Reed Hastings really did have late fees, but it wasn't Apollo 13, it was like Encino Man or something, and he's just too embarrassed to admit it. >> [laughter] >> For management, a 10 is Warren Buffett, a one is Homer Simpson. Uh both of you have eights once again, Rick. >> Yeah, so Hastings stepped down as co-CEO 3 years ago. Uh in June of this year, he he gave up his seat as board chairman. Uh Netflix is still in good hands. So, Ted Sarandos, uh he's been the head of content for 26 at Netflix, and Hastings promoted him to co-CEO 6 years ago to be in the position to lead the company like he is today. Content is king, and Sarandos is considered one of the most powerful people in all of Hollywood as a gatekeeper to hundreds of millions of homes. So, he's co-CEO again, uh this time with Greg Peters, and while I'm not always a fan of the co-CEO structure, uh they have an 85% employee approval rating on Glassdoor, so that's that's not too shabby. I'm I'm happy Gilmore's {comma} two. >> Nice. >> Yeah, I mean Sarandos and King, they've been a huge part of Netflix's culture for decades, and I think like losing the Warner Brothers deal to Paramount, to me that's a win because it demonstrates that discipline is worth more than ego, and I think that's one of the things a co-CEO role does is you have checks in an industry that's filled with massive egos that all want to be the biggest. Disruption and willingness to change are in the company's DNA. These were the people that built that. Um but the bottom line is that Netflix, as much as they disrupt and innovate, they're not in a rush, uh and they don't rush into big bad decisions that the company can't undo. >> That 85% employee approval rating is is pretty I mean, obviously, the stock's gone up, so that that helps you get a good approval rating, uh you know, over time. But but all it's a hard-charging company. They they they're >> Yeah. >> they've they're not uh you're working at Netflix, so that that's 85% approval is pretty impressive. Uh for financials, a 10 is a fortress, a one is yikes. Jason's at a seven, Rick you're at a six. >> Yeah, so Netflix has come through with an annual profit for 23 consecutive years. Most streaming companies are just starting to figure that out. Growth is solid, but it is slowing. The 11.7% growth that Netflix is targeting in for revenue is its weakest year-over-year growth in three years right now. Throw in a debt-heavy balance sheet and I'm saving my least enthusiastic score, a six, for this category. >> Yeah, even as and everything Rick said I agree agree with, but even as growth slows, the margin profile continues to be really impressive. Debt is meaningful, but I think it's also manageable. As much as debt has grown, the company also has massive amounts of cash on the balance sheet and also has really impressive cash flows, too. >> All right, Jason. Let's talk the magic question, valuation. How well will Netflix's stock do over the next five years? How safe is it? A 10 is a sure thing, one's a lottery ticket. >> Yeah, I think two things can be true. The business is facing a more competitive environment than it ever has going forward. And also mediums mentioned short forms like TikTok and Instagram, to some degree YouTube as well. There is a shift in where people are going to consume content. That's harder for Netflix to compete against. And that's the reason my safety score is a six, but I do do think the valuation takes in those risks and the opportunity is really good for what is still a great business, even in a changing landscape. So, I think 10 to 15% is probably well within reason for what the company can do over the next half decade. >> Yeah, I went with 10 to 15% for a five-year return. So, if Netflix was trading at fresh highs with its growth slowing and Netflix considering free ad-supporting tiers outside of the US as they are right now, I would be less bullish here. However, the stock has been cut basically by down more than 40% over the past year. Starting lines matter, so I think even Netflix with growing pains can beat the market from here, from this point. My safety score is a seven. Uh it's not that I think Netflix is invincible. It's just that it continue if it continues to struggle, someone is going to buy it out. Given the buyout premium that we've seen the lesser Warner Brothers Discovery and Paramount got, uh as an investor, I see this as a win-win scenario if you're looking at the safety net. >> Thank you to Rick and thank you to Jason. They've given Netflix a solid overall score of 7.3 out of 10. That's about near the average of what Netflix has scored in past scoreboards. Uh for top hits, uh Rick has none, but Jason prefers Alphabet because he thinks YouTube has a clearer growth path. Obviously, Netflix is the pure play. Alphabet owns a lot of stuff. Uh look out for a new scoreboard every market day at 7:00 p.m. Eastern. Next up is Winmark. Till then, full on. Rick, I know you've been a Netflix bull and a Disney bull. Right now, new money, you have no no prior ownership. Is either a buy for you and which one? >> I think between the two right now and again, I'm a I'm I'm probably going to be a bull for those two companies forever. Uh I think Netflix right now, Disney Disney I mean, Disney's also gotten hit hard over the last year, but I think they have a they have more stuff to prove. Whereas Netflix, I think it's just a matter of just a quick momentum turn. That's not going to happen to a company like Disney that's scoring low single digits and just, you know, meandering about. I mean, I like the new CEO, but uh Netflix if it's between the two.