Finance
Is it time to buy the dip on this phenomenal streaming stock?
Investors have been hit by some unrest in recent days. Soft US economic data, a rate hike in Japan, and Berkshire Hathaway‘s aggressive sales led to notable declines this past week for the S&P500 and the Nasdaq Composite index.
However, observant investors understand that volatility is the norm when it comes to achieving solid long-term returns. In fact, the selloff could create lucrative opportunities for otherwise fantastic companies, like this streaming pioneer whose shares are down 10% from their 2024 peak (as of August 6).
Should Investors Buy the Dip on This Phenomenal Stock?
Dominates the new media landscape
Investors who want to gain exposure Netflix (NASDAQ:NFLX)the leading pure-play streaming company, may be looking to capitalize on the market’s pessimism. There are a few reasons to like this company.
Let’s start with Netflix’s first-mover advantage. The lead in the streaming race helped attract customers at a rapid pace, with outsized revenue growth. Netflix dramatically won over subscribers because it offered a superior user experience compared to traditional cable TV.
Of course, the streaming industry is much more competitive now. But Netflix rules. As of June 30, the organization had 278 million members in more than 190 countries. This has become a global media and entertainment powerhouse with economies of scale.
Granted, growth will slow even as management estimates growth total addressable market (who are not currently Netflix customers) to reach 500 million smart TV households worldwide. In the most mature markets, the US and Canada, Netflix has historically been able to successfully increase its pricing power.
Netflix’s size means it generates plenty of revenue, to the tune of $36 billion in the last twelve months. This allows it to spend large amounts of money on producing and licensing content while recording growing profitability. The company expects to report an operating margin of 26% this year. That would be better than last year’s 21% and 2022’s 18%. Netflix is clearly showing the benefits of its scalable business model at a time when rivals are struggling with the bottom line.
Because Netflix spent so much money in the 2010s to acquire subscribers and develop its content offerings, critics never imagined the company would generate positive free cash flow (FCF). Netflix proved the doubters wrong. The company rakes in billions of dollars in FCF and uses some of it to buy back stock.
Don’t ignore the appreciation
It’s rare for investors to see the shares of such a dominant company go on sale. In May 2022, Netflix shares sold for a price price-earnings ratio (P/E) ratio of 15, which is unheard of. In addition to the general market weakness due to rising interest rates, investors were concerned about Netflix’s subscriber loss in the first quarter of 2022. But in retrospect, this turned out to be a great buying opportunity.
Netflix shares aren’t that cheap these days. It trades at a price-to-earnings ratio of 39. At first glance, this doesn’t seem convincing. It represents a 25% premium on the Nasdaq-100 index. However, it is much cheaper than the stock’s five- or 10-year average valuation multiples.
It’s also worth pointing out that Netflix’s earnings per share (EPS) have grown at a compound annual rate of 52% over the past five years. According to Wall Street analyst consensus estimates, earnings per share are expected to grow 32% annually between 2023 and 2026.
With shares down 10% from their 2024 peak, it seems like a good time to take advantage of the dip and add Netflix to your portfolio.
Should You Invest $1,000 in Netflix Right Now?
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway and Netflix. The Motley Fool has one disclosure policy.
Market Selloff: Is It Time to Buy the Dip on This Phenomenal Streaming Stock? was originally published by The Motley Fool
