The combination of widespread aversion to market risk and widespread concern that stay-at-home stocks have peaked has taken a heavy toll on Netflix (NASDAQ:) stocks.
So far, the Los Gatos, California-based entertainment giant has seen its market capitalization fall by more than 40% since the beginning of the year, making it the second-worst performance in the Index. Since hitting a record high of $700.99 on Nov. 17, the stock is down about 45%, closing at $386.7 on Tuesday.
Netflix's dive accelerated after the company released its latest version last week, showing that subscriber growth isn't returning as quickly as analysts had expected. Compared to four million a year earlier, the company now expects only 2.5 million subscribers in the current quarter.
It also slightly missed the subscriber count estimate for the fourth quarter, adding 8.3 million subscribers instead of the expected 8.5 million.
However, we believe this drastic correction provides a great entry point for investors interested in buying the best streaming entertainment stocks available at a much lower price.
A Remarkable Company
Post-profit weakness isn't something new for Netflix investors. According to Bloomberg data, the day after earnings, stocks have only risen twice in the past 12 quarters, not counting the most recent quarter.
But Netflix has often recovered strongly from the slump, aided by its superior content and technology. Smart investors are already moving their money to take advantage of this massive downward movement.
Bill Ackman of Pershing Square bought more than 3.1 million shares of Netflix this week, making him a top 20 shareholder. He said the substantial drop in Netflix's stock price was further exacerbated by recent market volatility in a tweeted letter.
“I have long admired Reed Hastings and the remarkable business he and his team have built. We are delighted that the market has given us this opportunity.”
In a contrarian move, Bears Benchmark Co. long time Netflix upgraded and said the sale seemed excessive.
What makes Netflix a good buy-on-the-dip candidate is the growing amount of original content. Netflix spent about $17 billion on original content last year, a 40% jump from the previous year.
For the current quarter, Netflix has a strong lineup of movies and TV shows, including new seasons of The Witcher, You, Bridgerton, one of the biggest hits, and The Adam Project, a highly anticipated time travel themed movie starring Ryan Reynolds and Jennifer Garner.
While Netflix spent huge amounts on new content, it has expanded its margins from 7.2% in 2017 to 18.3% in 2020 and 21% in 2021.
Another positive development that long-term investors should consider is that Netflix does not rely on debt to fuel its growth. After years of borrowing to finance production, the company said it no longer needs to raise outside funding to support its day-to-day operations.
Bottom Line
Netflix stocks have become an attractive buy after the latest slump, which we believe is exaggerated. After bolstering its cash and competitive position during the pandemic boom, the company is better positioned to return to growth.
