Could Skydance Pose a Big Threat to Netflix's Future Growth?

Earlier this year, Netflix (NASDAQ:NFLX) tried unsuccessfully to acquire Warner Bros., ultimately having to walk away from a potential deal as a bidding war with Paramount made it too costly to do so. The end result is that now it has to face a stronger competitor in the streaming market: the newly formed Skydance (NYSE:SKYD).

Investors were initially pleased when Netflix announced it was walking away from the deal back in February. But the acquisition could create a problem for Netflix, as it may now face greater competition.

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Netflix's growth rate could come under pressure

A big problem for Netflix of late has been its growth rate, which has been volatile in recent years and declining of late. And with co-founder Reed Hastings also leaving the company this year, there are more question marks around what its future will look like.

NFLX Revenue (Quarterly YoY Growth) data by YCharts

Meanwhile, with Skydance, Netflix has a more formidable rival to worry about, with a ton of strong content in its portfolio, which may be the most intense competition yet for Netflix. Skydance is planning to combine its streaming services, which may give consumers a more compelling entertainment option to consider, including HBO Max and Paramount+. It also plans to release 30 movies a year.

Skydance may aggressively go after market share, and as consumer budgets are strained due to inflation, balancing multiple subscriptions may not be tenable for many consumers. Offering the best, most diverse mix of content may be key, even if the price is higher.

Why I'd still go with Netflix

Netflix is no stranger to competition. However, its ability to consistently generate high-quality content should give growth investors confidence that it can succeed, even as it faces more robust competition from Skydance.

No one's been able to knock Netflix off the top of the streaming industry yet, and while Skydance does have potential, it's far too early to see what its execution will be like or how much competition it will truly pose to Netflix down the road. It's a risk that Netflix investors shouldn't ignore, but it's also not one that I'd lose sleep over.

With Netflix stock trading near its 52-week low and at just 22 times its trailing earnings, it’s an attractively priced investment. It's still generating double-digit growth, and while there may be question marks about its future, the business remains on a fairly strong path. For long-term investors, now can be a great time to buy the streaming stock.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.