Three Reasons to Buy Netflix After Its Recent 30% Plunge

1. Still the leader

Netflix’s net paying subscriber additions for Q4 clocked in at 8.28 million, right in line with Wall Street expectations.

But management’s subscriber-count guidance for next quarter — only 2.5 million new accounts — triggered serious concerns over increasingly stiff streaming competition from the likes of Disney+ and HBO Max.

That said, investors shouldn’t overlook the fact that adding over eight million subscribers in Q4 is still very impressive, particularly for a platform that already has a massive audience base.

With Netflix’s global streaming paid memberships standing at 221.8 million, the company is still far and away the dominant digital streamer.

And while the next couple of quarters will certainly be bumpy, long-term tailwinds remain squarely in Netflix’s favor as consumers continue to cut their cable at a breakneck pace.

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2. Pounce on the plunge

This isn’t exactly the first time Netflix shares have crashed on disappointing subscriber growth.

In 2015, the company’s subscriber guidance for Q4 came in well below expectations, sparking an 8% selloff the following day. And in the following year, its Q2 subscriber numbers triggered a 13% crash in the shares.

For investors who ignored the noise and purchased Netflix on those two down-days, they are currently sitting on returns of 263% and 327%, respectively.

Priced at around US$377 per share, the video streaming giant is currently down more than 46% from its 52-week highs.

In fact, the shares have fallen so far that they’re now at pre-pandemic levels.

Giving up nearly two years’ worth of gains is a tough pill to swallow for Netflix investors. But for value-hunters with a long-term time horizon, it might be one of the best buying opportunities to come around in a while.

Consider this: In 2019, Netflix’s price-to-earnings multiple was 104 – quite expensive, even for growth stocks. But thanks to the recent plunge, the stock sports a P/E of just 34, representing a massive discount from Netflix’s typical sky-high earnings multiples.

3. Strong financials

The last reason to consider Netflix is the best and most simple one: fundamentals remain rock-solid.

In Q4, Netflix generated US$7.7 billion of revenue, representing a 16% increase year over year. Earnings came in at $1.33 per share, up 12% from the year-ago period.

Despite the weak subscriber guidance, management still sees revenue growth of 10% next quarter to US$7.9 billion.

Most importantly, management expects the company to become free cash flow positive for the full year 2022 and beyond.

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Bet on a big bounce?

While Netflix has had a painful start in 2022, it still has some bullish supporters on Wall Street.

Cowen analyst John Blackledge is keeping an outperform rating on the stock. While he lowered his price target from US$750 to US$600, it still suggests potential upside of about 60%.

BMO Capital Markets analyst Daniel Salmon also maintained his outperform rating on Netflix with a price target of US$650 — implying upside of more than 70%.

There’s a good chance that Netflix shares will remain under pressure over the short term. But given its still-dominant position in video streaming, Netflix’s ability to provide outsized long-term returns looks stronger than ever.

An alternative to stocks

With the S&P 500 down more than nine per cent since the start of the year, it may be a good time to look at investments that don't track the stock market, such as blue-chip art.

Fine art has traditionally only been available to wealthy investors with the thousands or millions needed to buy high-end artworks. But thanks to a new platform that allows buyers to purchase shares of artworks, the art world is now accessible to investors at every price point.