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The Netflix share price is falling. Should I buy?

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The share price of movie streaming service Netflix (NASDAQ:NFLX) has tumbled in after-hours trading in the US.  As I type, it’s down 8%. Earlier this morning, it was down 11%. Should Foolish UK investors regard this as an opportunity to buy this market darling on temporary weakness? Here’s my take.

Why is the Netflix share price falling?

It all seems to be down to the growth in subscribers so far in 2021. Although revenue of $7.16bn beat expectations, the market was expecting around 6.25 million new accounts to have been opened between January and March. The figure released last night fell far short of that at 3.98 million. 

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To make matters worse, Netflix expects only 1 million new account openings for the next quarter of its financial year. Again, this does not compare well to the near-5 million predicted by analysts. 

In its defence, Netflix said that the recent slowdown was likely due to the lack of new shows on the service. This seems fair. The pandemic succeeded in halting production for many companies and movie studios in 2020 (including FTSE 250 broadcaster ITV).

Will the rout continue?

It’s hard to say if this will continue. There are certainly reasons for thinking this fall in the Netflix share price could prove temporary. The company remains the clear market leader. Almost 208 million people already hold accounts. Moreover, the release of new seasons of popular shows later this year could lead to a better set of numbers. 

One must also put things in context. Multiple coronavirus-related lockdowns have been a boon to the company. Almost 16 million new subscribers signed up for the service in Q1 2020, a large proportion of them in Asia. As a consequence, the Netflix share price is up 65% since the crash. Seen in this light, some slowing of momentum (and profit-taking) was inevitable.

Then again, there are reasons to be bearish. The successful rollout of vaccines and gradual return to normality means people will be less inclined to stay in over the rest of 2021. Even if they do, Netflix continues to face strong competition from the likes of Disney+ and Amazon Prime. There’s also something to be said for being wary of stock market valuations right now, particularly in the US. 

Foolish options

Whether the fall in the Netflix share price represents an opportunity or not depends on an individual’s time horizon and risk tolerance, in my view. In the near term, there’s no way of knowing whether things will get worse. Over a longer time frame, the odds of making money should improve.

That said, I won’t be buying the shares today. Instead, I’d be more likely to buy a fund that owns a slice of Netflix in addition to other stocks. The Polar Capital Technology Trust or Baillie Gifford American are examples. There’s no guarantee that the value of these funds won’t fall as well. However, the fact that my cash is invested in multiple companies rather than just one means I should be able to sleep more soundly.

Netflix has been one of the best investments in recent times. I don’t doubt it still has the potential to make money for those buying now. With a market cap close to $250bn, however, expectations of future returns must be tempered. The time for me to throw everything at the stock was 10 years ago.  

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares of ITV. The Motley Fool UK owns shares of and has recommended Amazon, Netflix, and Walt Disney. The Motley Fool UK has recommended ITV and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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