After going on an absolute tear during the heat of the COVID-19 pandemic, Netflix‘s (NASDAQ: NFLX) stock has hit a roadblock. A couple of rickety earnings reports and an increasingly unstable economy have caused shares of the streaming titan to nosedive 64% since the start of 2022. Investors have clearly fallen out of love with the stock for now, but has the latest sell-off created a golden buying opportunity for those willing to ride out the storm? After all, going against the tide and buying at today’s lows could lead to massive gains down the road.
Let’s dive into Netflix’s current situation to help investors decide if it’s a worthy buy at the moment.
A deep dive into the fundamentals
Netflix recently posted its second-quarter earnings report, which lightened some concerns about the streaming platform on Wall Street. The company’s top line expanded 8.6% year over year to $8 billion, finishing in line with analysts’ estimates, and its diluted earnings per share rose 7.7% to $3.20, comfortably beating consensus forecasts by 8.5%. The video streaming leader lost 970,000 paid subscribers during the quarter, but despite being less than ideal, the loss was much lower than the estimate of 2 million management provided in the company’s first-quarter earnings call.
In its earnings release, the company stated that its near-term focus is on reaccelerating revenue growth, which has declined in recent times due to password sharing and intense competition from other multinational brands like Disney and Amazon. In an effort to better monetize its streaming services, the company will introduce a new, lower-priced ad-supported subscription tier. Netflix will team up with Microsoft, which will serve as a technology and sales partner, to launch the new offering in early 2023.
The video streaming leader is also in the early stages of trying to monetize the 100 million-plus households that are currently enjoying its streaming services via password sharing. Right now, the company is testing two different approaches in Latin America to help combat the issue, and its goal is to roll out an easy-to-use paid sharing offering in 2023. So, while Netflix is still in the experimental phase of trying to restore growth, the platform does enjoy various options it could turn to in order to expand its business in the coming years. And trading at just 19 times earnings, it might be time to place a long-term bet on the streaming king.
Is it time to buy Netflix?
If Netflix grows its top line at a compound annual growth rate (CAGR) of just 7% from fiscal 2021, it will generate roughly $42 billion in total sales by 2025. Assuming an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 25%, which would translate to an annual EBITDA of $10.5 billion, and an enterprise-value-to-EBITDA multiple of 17, which is the average for the S&P 500 at the end of 2021, Netflix would have an enterprise value (EV) of $178.5 billion. That represents a 68% upside from its $106.4 billion EV today.
Thus, Netflix appears to have a favorable risk-reward profile right now. Likewise, the video streaming industry is extremely crowded at the moment, which is likely unsustainable over the long run. Once the have-nots are phased out, Netflix, which has already proved to be a highly profitable business, is well positioned to remain a secular winner. At present levels, Netflix is an intriguing buying opportunity for investors willing to take on some near-term risk.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Luke Meindl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.