Netflix Is Down 32% Since Reed Hastings Said He Was Leaving. Should You Buy the Dip or Is It a Red Flag?

Netflix (NASDAQ: NFLX) has been one of the top-performing stocks of the last generation, but the streaming giant has hit a rough patch in recent weeks.

The stock is down 32% since April 16, when it reported first-quarter earnings. Shares fell due to weak guidance for the second quarter as the company called for revenue growth to slow to 13.5%.

However, there was another item that also spooked investors. Reed Hastings, the co-founder of the company and longtime CEO, said he would step down from the board on June 4. Hastings had ceded the CEO chair in 2023, but this move leaves him without a formal position in the company for the first time ever.

Hastings guided the company's meteoric rise, steering Netflix from a DVD-by-mail outfit to a streaming service to an original entertainment powerhouse that now dwarfs rivals like Disney in market value. He set out to disrupt the video entertainment industry, including the cable ecosystem and theatrical box office, and successfully did so, making internet video the industry standard.

Before determining whether the sell-off is a buying opportunity, let's take a look back at Hastings' impact on the company and the state he leaves it in.

Image source: Netflix.

A true visionary

While Hastings may not be thought of as an entrepreneur as transformative as Elon Musk or Steve Jobs, he pioneered a new industry and saw the potential of internet video before anyone else did, predicting long ago that it would gradually replace cable.

As a stock, Netflix's return rivals Tesla, Apple, and any other stock, up more than 61,000% since its IPO. That means $1,000 invested in Netflix at the IPO in 2002 would be worth more than $600,000 today.

Hastings is also regarded for establishing a unique culture at Netflix, where "A" performers were promoted and "B" ones were given a generous severance. He's known for frequently saying no and keeping Netflix's mission tight. Hastings long rejected advertising and allowed password-sharing despite calls to do otherwise, policies that Netflix finally reversed after the pandemic.

Under his watch, the company generally avoided acquisitions, preferring to build new products and franchises, despite its recent attempt to buy Warner Bros. Discovery.

Overall, Hastings has left a clear imprint on the company and its culture, and when announcing his departure, he credited co-CEOs Greg Peters and Ted Sarandos, saying their "commitment to Netflix's greatness is so strong that I can now focus on new things."

What it means for Netflix stock

Hastings stepped down from the CEO role in 2023, and Peters and Sarandos have proven themselves capable leaders since then. However, it's understandable if investors are wary of Hastings, the person who's most responsible for the company's success, totally checking out.

His departure comes at a time when Netflix surprised shareholders by pursuing a massive acquisition of Warner Bros. Discovery, which would have saddled the company with the legacy media assets that it has long argued were inferior to its model. Investors pooh-poohed the deal, sending the stock down as it came closer to fruition and then pushing it higher once Netflix bowed out and Paramount Skydance won WBD.

Netflix also faces challenges like a maturing streaming market in its core territories, the need to diversify from its subscription model, and competition from the biggest tech companies in the world.

Netflix has been challenged in the past, including the Qwikster debacle and the post-pandemic hangover, and the stock has always bounced back. While the business is in a more mature stage of its life cycle, it still seems like a mistake to bet against it.

There remain growth opportunities for the company, including expanding its advertising business, moving into live sports, and tapping new entertainment markets like games and podcasts.

After the 32% pullback, Netflix is as cheap as it's been since the doldrums in 2022. While Reed Hastings deserves respect, that's enough of a discount to make the stock a buy right now.

At a P/E of roughly 30 after adjusting for the WBD termination fee and double-digit growth expected to continue, Netflix is worth scooping up while it's on sale.

Jeremy Bowman has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Apple, Netflix, Tesla, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.