Netflix stock has been pummeled, but now trading at 17 times this year’s earnings, bulls need to evaluate Netflix stock for its value, not its growth.
Netflix (NFLX) – Get Netflix Inc. Report stock has been buried. Of all the FAANG components, this one has been the worst performer by a landslide.
Shares are currently down 68.8% this year, down 73.2% from the high and have suffered a peak-to-trough decline of 76.8%.
That is rather horrendous, although it’s not Netflix’s first brush with a ruthless bear market. In 2011 to 2012, shares declined 82% from the high. At a time where it’s hard to find a positive, one uplifting realization may be that the stock found a way to rebound from a nasty decline like this before.
The question is, can it do it again?
Netflix Is a Value Stock
Aside from Netflix, Meta (META) – Get Meta Platforms Inc. Report stock is the next worst-performing FAANG component, with a peak-to-trough loss of 59.9%. Still, that’s considerably better than Netflix. No component has been exempt from the selling pressure though, with the best-performing component — Apple (AAPL) – Get Apple Inc. Report — falling 29.5%.
For Netflix though, the ramifications are different. Most investors already know about Apple’s stable cash flows and reliable businesses. That hasn’t been the case with Netflix — although it’s getting better.
In a scenario like this, there are some cons and we can’t pretend they don’t exist.
Netflix has increasing competitive pressure from Disney (DIS) – Get The Walt Disney Company Report, Warner Bros Discovery (WBD) – Get Warner Bros. Discovery Inc. Report and others, which are adding streamings subs while Netflix is losing them. In its most recent earnings report, the company shocked investors and analysts with a net subscriber decline.
Granted, the decline last quarter can be blamed on geopolitical issues, but the guidance still wasn’t very promising.
That said, the company still sits atop the global streaming business with more than 220 million customers. Further, it’s forecast to grow revenue between 9% and 10% a year in each of the next four years, while Netflix is working to crack down on password sharing and on introducing a new ad-based option — perhaps in a tie-up with Roku (ROKU) – Get Roku Inc. Report?
If the company can get one or both of these initiatives right, it could be a big driver for the top- and bottom-line, thus making Netflix stock potentially undervalued.
While the streaming giant has notoriously struggled with its cash flow and profit in the past and although revenue forecasts have slowed considerably vs. prior years, investors must also realize the stock trades at 17 times this year’s earnings.
That’s right. Despite being known for a nosebleed valuation in the past, Netflix now has a valuation that’s in-line or lower than the S&P 500. One could argue, and I would agree, that Netflix’s earnings are of lower quality than that of the index, but the fact that we can even make the apples-to-apples comparison is surprising in itself.
Trading Netflix Stock
Weekly chart of Netflix stock.
Chart courtesy of TrendSpider.com
There’s no other way to say it other than Netflix stock has cascaded lower over the last seven months.
Shares are now trying to find their footing around $165 and are so far succeeding. However, $200 is acting as resistance, as is downtrend resistance.
If Netflix stock can clear $207.38 — the June high — and the declining 10-week moving average, it opens up the post-earnings high up near $250.
The $250 to $270 area used to be solid support, but after Netflix sliced through this zone in April, investors are worried it will become resistance. If it does, it will be key for Netflix to avoid making a new low, signifying that a potentially larger up-move is still in the cards.
However, if it can instead reclaim the $250 to $270 zone, it will be key for this area to turn into support and will put the $290 level in play, which was the low during the Covid selloff in March 2020.
