What is the true value of a Netflix subscription? Wall Street may now have a different response.

• Since its 2002 IPO, Netflix has experienced tremendous growth, increasing more than 600-fold and becoming one of Wall Street's top performers.
• Wall Street has granted high valuations to shares, despite significant cash-flow losses resulting from substantial investments in new films and programs.
• While a slowing subscriber growth has negatively impacted the stock this month, analysts suggest that a slower-growing Netflix could actually be more profitable. However, this does not necessarily mean it will be more valuable.

Despite experiencing a 600-fold increase in shares within 20 years, the company has always faced skepticism. After reporting a slight miss of Wall Street targets for subscriber growth in January 2021, shares plummeted to less than half of their peak value, with some investors betting that the video-streaming giant's hypergrowth phase has finally come to an end.

Bill Ackman's $1 billion investment in Netflix raises the question: Should the company be considered a value stock, with slower growth leading to cost-cutting measures and improved profit margins? If so, can it be a successful investment?

According to LightShed Partners media analyst Rich Greenfield, if you believe there are only 300 million potential streaming subscribers globally, you should reduce expenses, increase prices, and maximize your existing network. However, there are significant growth opportunities over the next five years.

No one on Wall Street has been a bigger bull on Netflix than Mark Mahaney, the Evercore ISI Internet analyst, who has had a buy on the company for more than a decade, consistently predicting big gains despite the stock's high cost.

Fourth quarter earnings caused Mahaney to cut his recommendation, as the company missed its subscriber growth forecast and predicted a bigger slowdown in the first quarter of 2022.

Mahaney stated that there is a 50% chance that the company will grow 10% annually within the next five years, with 5% coming from new subscribers and 5% from price growth.

Netflix believes that the decline in subscriber growth is temporary and is mainly due to the delayed release of its major new productions, including the second season of Bridgerton, which occurred too late in the quarter to allow the company to maintain its previous pace.

Netflix's CFO, Spencer Neumann, stated that there is no significant change in the business structure. Despite strong retention and increased viewing, the company did not grow its acquisition rate as much as desired.

What would Netflix be like if the company shifted its focus from growth to near-term profits? How would this differ from a Netflix that prioritizes growth?

Netflix has prioritized growth and investment in its content, particularly in new films and shows. Sales have increased from $6.77 billion in 2015 to $29.7 billion in 2020. The company has heavily invested in new content and did not repurchase any shares in the fourth quarter. Additionally, Netflix does not pay a dividend.

If Netflix were remade as a mature company, it is likely to increase revenue by around 10% annually, rather than the 19% and 28% growth rates it achieved in 2021 and 2019, respectively, before the Covid pandemic. According to Mahaney, his revised model predicts Netflix's sales reaching $46 billion in 2025, up from $29.9 billion in 2021, representing a 16% average growth rate that slows to 10.6% in 2025.

The company's decision to raise prices in its largest market, the U.S., by $1.50 a month to $15.49, is likely to continue raising prices.

It is likely that slowing content spending growth would not be as effective as cutting it, meaning Netflix will continue to have a significant impact on Hollywood's content production. In comparison, Netflix's $5 billion in new content spending last year is significantly higher than Viacom's $1 billion spent on content for Paramount Plus. According to Kagan Research, Netflix's content spending is projected to reach nearly $10 billion by 2025, which is almost the same amount the company spends on licensing content from other producers.

To achieve its goal of reducing its $15.5 billion debt to a level of $10 billion to $15 billion, Netflix plans to pay off $700 million of debt this quarter. This is in line with the company's own endorsement of this goal.

Mahaney stated that the company's decision to embrace more stock buybacks is a move towards making its shares more valuable, although it is doing so more cautiously than a business that is transforming its shares into a value play. The company announced that it will use an unspecified amount of excess cash to buy back its own shares, which is a change from its previous history of not buying any of its own shares before mid-2021.

Mahaney believes that it might not be a bad business. He predicts that by containing costs and building scale, profits will grow 21% annually. Although 10% growth is still good, he says that it's just a matter of time before Google and Facebook also achieve 10% growth.

Would it be more advantageous for a business to adopt the same strategy as Netflix, increasing the likelihood of returning to its October stock price of $690.31 per share?

Greenfield says no.

Netflix has missed subscriber growth forecasts in the fourth quarter seven times in the last 20 quarters, while it has exceeded expectations 13 times, as per the company's letter to shareholders.

Netflix has not yet tapped into its full potential user base, according to Greenfield. While the company has 75.2 million U.S. subscribers, which is less than three-fourths of U.S households, the real growth potential lies overseas. Specifically, Netflix has only signed up about half of European households with high-speed Internet access and about 15% of Asian homes.

Netflix remains the leader in the streaming industry, with 26% of all minutes spent on Web video in the U.S., according to recent Comscore data. This is higher than the 21% for YouTube and the single-digit numbers for its streaming rivals like Hulu, Disney +, and HBOMax.

Netflix maintains its share of viewing minutes due to its consistent addition of new content, which is a result of its substantial investment in content production. Greenfield advises continuing to push forward with this strategy.

Raising your price becomes easier when more people watch your content, he stated.

According to Mahaney, Netflix must determine whether it will become the next eBay or the next Google. eBay experienced a decline in annual sales growth after the 2008 financial crisis, with sales growth in the mid-single digits by the middle of the 2010s. Despite ill-fated acquisitions of Skype and PayPal, its shares stagnated for a decade. In contrast, Google has had a nearly unprecedented growth streak.

Netflix's stock has fallen to about 30 times this year's expected price, providing Ackman with an excellent chance to build on his track record of high-profile scores.

Netflix can increase its profits to almost $140 per share by 2030, surpassing the $14.10 per share it made in 2021, if it widens its profit margins to 45%, from 21% last year. Mahaney predicts that net profit margins should reach 30% by 2025. Alternatively, Netflix can continue to grow its revenue by 15-20% annually, keeping pace with content spending as Greenfield foresees.

Ackman expressed his respect for Reed Hastings, the architect of Netflix's growth strategy, while announcing his new stake. He stated that Netflix's improving free cash flow profile would enable continued investments in growth and the return of cash to shareholders.

According to Ackman, many of our greatest investments have been made when other short-sighted investors dismiss excellent companies at seemingly unbelievable prices, when viewed from a long-term perspective.