I Predicted Netflix Would Soar After July 16. The Stock Is Down 6% Instead. Here’s Whether I’m Still a Buyer.
As a Netflix (NFLX +1.73%) shareholder for the last 24 years — yes, two dozen years this October — I’ll be the first to concede that the value of my stake in the leading premium video streaming platform has withered lately. The shares are down more than 40% over the past year, cut nearly in half from the all-time high it notched in June of last year.
I was hoping that its second-quarter results earlier this month would reverse the bearish narrative. I was wrong. The stock went on to plummet 9% in the two trading days following its July 16 financial update. Despite inching higher over three of the four subsequent trading days, Netflix investors are still down 6% since its earnings report. My financial position in holding has weakened, but the same can’t be said about my conviction.
Image source: Getty Images.
I was wrong
Ahead of Netflix’s earnings report, I argued that it was too cheap to ignore. Netflix was trading for 24 times earnings, a historical low outside of the market’s short-lived but potent 2022 swoon. Expectations seemed low for the second quarter. I was about to learn that cheap stocks can get cheaper, and low expectations can be undercut by reality.
Netflix did have a challenging second quarter. Revenue came in lighter than its own guidance three months earlier. Guidance was worse. The 11.7% top-line growth that the company is targeting for the current quarter would be its weakest revenue increase in three years. Netflix did come through with a modest beat on the bottom line, but it was a forgotten cherry on top of a melting ice cream sundae.
Netflix stock now carries a P/E ratio of 22. Expectations are understandably even lower now than they were before. It’s not a good place to be, but this doesn’t have to be where the story ends.
Today’s Change
(1.73%) $1.19
Current Price
$70.08
Key Data Points
Market Cap
Day’s Range
$67.99 – $70.68
52wk Range
$65.08 – $126.71
Volume
5.4K
Avg Vol
42.9M
Gross Margin
49.53%
I might still be right
Everything seems so clear in the rearview mirror. Netflix’s willingness to pay a premium for Warner Bros. Discovery, chatter about free entry-level tiers in select markets, and analysts’ cautionary notes and price target reductions in the days leading up to July 16 were signs of weakness.
Year-over-year revenue is now likely to decelerate for the third consecutive quarter. Netflix testing a return to free-trial subscription offers and exploring a free tier outside of the U.S. should question even the most ardent bull’s perception of pricing elasticity. Netflix not posting subscriber or engagement metrics anymore only makes the storm cloud darker.
I still support Netflix here. It remains highly profitable. It continues to grow on both ends of the income statement, now trading for an even more reasonable 18 times next year’s earnings target. No other platform comes close to the more than 300 million paying accounts Netflix serves, which gives it content scalability that is difficult to match.
Netflix has sold off before. It has always bounced back, so far. I was wrong about the second quarter. My conviction remains bullish at today’s more compelling starting line.
