3 bullish reasons to buy Netflix and chill — for contrarian traders looking to go against the herd, look here first
Karen Thomas, CFA
Freelance Contributor
The streaming giant's problems are well known. Here is the opportunity.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Netflix shined during the pandemic. When stay-at-home orders prevented folks from going out, the company posted blockbuster subscription and revenue growth. The stock became a pandemic darling, nearly doubling from 2020 to 2022.
Today, things are different. Slowing subscription growth has caused investors to question the company’s long-term growth prospects — and Netflix shares have cratered in response.
While trying to catch a “falling knife” is always a tricky proposition, here are three reasons to consider Netflix shares once the dust has settled and the downward momentum has eased.
1. Netflix is still king
Netflix remains the number one streaming giant with unmatched scale, the result of years of consistently strong growth. Subscriptions have grown 32% over the past two years and now sit at about 222 million subscribers worldwide.
While analysts are disappointed with the current growth trajectory, management explains that another 100 million households watch without paying — thanks to password sharing. Management intends to crack down on password sharing going forward, which should add a significant boost to subscription growth.
To be sure, subscribers may be struggling to accept the rising cost of streaming services. Also, digital streaming competition from the likes of Disney+ and Amazon Prime continues to intensify. But with the stock down nearly 70% already in 2022, much of that bearishness might already be baked into the price.
2. Subscription and revenue opportunities are substantial
Netflix continues to have attractive growth opportunities ahead. In management’s words, “the long-term addressable market is unchanged.”
Its global addressable market continues to expand in lockstep with broadband infrastructure growth, as well as increasing smart TV usage in emerging markets.
In addition to going after password sharing, management is also contemplating offering flexibility for its subscriptions. For example, subscribers might be able to choose a lower-priced option if they don’t mind seeing ads.
Finally, there is the highly lucrative gaming opportunity. Netflix is currently “building its capacity to provide interactive gaming experiences.” This is one of Netflix’s top priorities and will reportedly offer nearly 50 games by the end of 2022 as part of its subscription.
3. Positive free cash flow generation signals a new era for Netflix
Breakneck top-line and customer growth aren’t the only things that should matter — particularly for a company like Netflix that is moving towards maturity. Profits are important, too. And Netflix is performing well on that front.
In Q1, operating margin clocked in at a solid 25% while the company generated $802 million in free cash flow. Growth worries aside, those numbers reveal a strong, high-quality business.
In hindsight, it’s clear that Netflix’s share price of $700 last year was the result of irrational exuberance. Today’s tag of $200 is far more reflective of the company’s real growth potential going forward — and may even be underestimating it.
Sign up for our MoneyWise newsletter to receive a steady flow of actionable ideas from Wall Street's top firms.
Are you thinking about saving? Well, stop thinking about it!
Take the change out of your piggy bank and make it work for you.
Acorns is a financial wellness tool that automatically rounds up your card purchases to the nearest dollar and puts those savings into an investment account. It takes the worrying out of investing and matches you with one of five investment portfolios.
Take five minutes to sign up for Acorns today and collect a $10 bonus.
In : #WATCHLiST
Tags: 3 bullish reasons to buy netflix and chill — for contrarian traders looking to go against the herd look here first
