California-headquartered Netflix (NFLX) is a popular provider of streaming content. I am bullish on the stock.
The streaming revolution is here to stay, and early investors in certain streaming companies are doing quite well today. Indeed, folks who bought Netflix stock a decade ago are sitting pretty – but lately, the stock has fallen out of favor. The share-price plunge has been so severe that some traders might wonder whether Netflix’s best days are in the rear-view mirror.
Yet, with stock-price declines there may be windows of opportunity for value hunters. It takes guts to buy when other people are selling, but the upside potential could be substantial with Netflix stock. As we’ll discover, Netflix is proving that premier technology-sector names can sometimes trade at surprisingly reasonable prices.
Speaking of reasonable prices, there’s a valid concern that high inflation might deter streaming customers from continuing to use Netflix’s services. However, the company’s president has raised the possibility of a solution which could help combat high prices while hopefully retaining some of Netflix’s customers.
On TipRanks, NFLX scores a 7 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.
A Brutal Quarter
After the onset of COVID-19, Netflix was firing on all cylinders as lockdowns forced people to find entertainment at home. The streaming movement shifted into high gear, and Netflix was the leader of a booming market.
Netflix stock reached a 52-week high of around $701 late last year, and it seemed as if the sky was the limit. As they say, though, you can burn up if you fly too close to the sun – and Netflix stock may have flown too high, too quickly.
Pullbacks can be healthy, but this one was brutal. Not long ago, Netflix stock traded at around $200. There’s no telling how far down it will go. Still, part of the “buy low, sell high” strategy is to buy at a low price, which isn’t always emotionally easy to do.
Technology stocks sometimes have sky-high valuations, but after its severe drawdown, Netflix stock is looking quite reasonably priced. Notably, Netflix has a trailing 12-month P/E ratio of 18.19, which indicates a compelling valuation for investors who like to buy bargain-priced stocks during periods of negative sentiment.
Also, it’s an interesting time to consider buying Netflix stock as the company is venturing ambitiously into the gaming market. Reportedly, Netflix intends to release 30 new gaming titles on its platform by the end of 2022. Currently, the company is adding four new games which can be downloaded from Netflix’s mobile app. Apparently, Netflix’s video games are available on both Android and iOS devices.
So, 2022’s first quarter wasn’t necessarily enjoyable for Netflix’s shareholders. It’s encouraging to know, though, that Netflix is getting serious about gaming, which is one way for the company to shore up its subscriber base.
Open to Lower Prices
One of the contributing factors that has taken a major toll on America’s businesses lately is price inflation. Many companies have struggled as U.S. consumers simply don’t have the same ability to spend money that they had a year ago.
High inflation may have been a contributing factor to Netflix’s less-than-stellar Q1 2022 financial performance. The company admitted that its “revenue growth has slowed considerably.” Specifically, Netflix’s revenue growth slowed to 9.8% year-over-year. That’s actually not too bad, but investors and analysts were accustomed to seeing Netflix knock it out of the park quarter-after-quarter, with revenue growth of 16%, 19%, or even 24%.
The aforementioned foray into video games could help to build Netflix’s revenue growth back up. However, focusing on video games doesn’t address the persistent problem of inflation. Consumers might reduce their discretionary spending for the rest of the year, and Netflix should respond decisively to this challenge.
Fortunately, it appears that Netflix may have a solution in the works. In a conference call, Netflix co-founder, Chairman, President, and Co-CEO Wilmot Reed Hastings brought up the topic of “low-end plans” and “lower prices with advertising.”
At first, Hastings seems reluctant to give this approach a try, saying, “I’ve been against the complexity of advertising and a big fan of the simplicity of subscription.” However, the Netflix president then assures that he’s a fan of consumer choice, saying, “allowing consumers who would
like to have a lower price and are advertising-tolerant get what they want makes a lot of sense.”
Furthermore, Hastings declared that this approach is something that Netflix is “looking at now” and a strategy that the company is “trying to figure out over the next year or 2.” With that, Hastings conveyed that Netflix is “quite open to offering even lower prices with advertising as a consumer choice.”
Wall Street’s Take
According to TipRanks’ analyst rating consensus, NFLX is a Hold, based on nine Buy, 28 Hold, and three Sell ratings. The average Netflix price target is $295.80, implying 45.84% upside potential.
The Takeaway
In its own way, Netflix might offer a solution to help combat rising inflation. It’s encouraging to see that Hastings and his company are open to trying out new strategies, which might help to increase Netflix’s revenue growth.
Moreover, Netflix stock is trading at a valuation that should bring value-focused investors into the fold. Therefore, it’s a great time to add some Netflix shares even if it’s scary to buy while other traders are selling.
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