Why It May Be Time to Buy the Dip in Netflix, Inc. Stock

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Netflix stock - Why It May Be Time to Buy the Dip in Netflix, Inc. Stock

Source: Via Netflix

Alongside the rest of the market, shares of tech favorite Netflix, Inc. (NASDAQ:NFLX) have struggled recently.

After a stunning first quarter performance that saw Netflix stock rise more than 50% and burst through the $300 mark for the first time ever, shares of NFLX have started off the second quarter on the wrong foot. As of this writing, NFLX stock is in correction territory (more than 10% off its recent highs).

But the reason for the drop in Netflix stock has very little to do with Netflix. Yes, the company has been subject to a “deleteNetflix” campaign that broke out in Brazil over a supposed factually incorrect show. But that movement is small in scale and seems to have disappeared just as quickly as it appeared.

Outside of that, things such as the data breach at Facebook, Inc. (NASDAQ:FB), production and credit problems at Tesla Inc (NASDAQ:TSLA), regulatory concerns over at Amazon.com, Inc. (NASDAQ:AMZN) and self-driving hiccups at Nvidia Corporation (NASDAQ:NVDA) have been weighing on NFLX stock.

In other words, it has been a confluence of external factors (not internal ones) which has pushed NFLX into correction territory.

Smell like a buying opportunity?

I think so. At over $320, Netflix stock was overvalued. It was due for a valuation reset on any weakness in the tech sector. Thus, the recent pullback isn’t surprising.

But below $290, Netflix stock is starting to look undervalued. Especially considering nothing has changed about the underlying growth narrative. Here’s a deeper look.

Netflix Has Great Long-Term Fundamentals

I’m a big believer in the long-term growth narrative supporting Netflix stock.

Netflix came in to the entertainment world and fundamentally changed everything about the industry for the better.

Not only did Netflix change the way we consume content (over-the-top and on-demand, versus through a cable box and on set programming times), but the company also altered our perception of how much it costs to consume that content (roughly $10 per month versus $100 per month for cable).

In this sense, Netflix made video content consumption more convenient and cheaper for the consumer.

In the technology world, especially today, cost and convenience always win out. Just look at Amazon, which offers the lowest prices and things like same-day shipping. Or look at Facebook, which offers a suite of services (including over-the-top media) for free. You could also look at any other social media platform, YouTube, Spotify, and many more.

In the business of providing a service to the consumer, you want to be cheaper and more convenient. Netflix is both of those things. Thus, until someone matches Netflix’s content portfolio at a similar or lower price point, Netflix will continue to march toward global domination of the media industry.

This is potentially a very big market. There are roughly 4.1 billion internet users in the world, and that number is only growing. Assuming an average household size of 2.5, that would equate to roughly 1.6 billion internet households.

NFLX has less than 120 million members. That means the company is tapping into less than 10% of its addressable market.

But in the United States, where there are roughly 115 million internet households (287 million internet users and household size of roughly 2.5), Netflix has 55 million members (and growing). That is a U.S. internet household penetration rate of nearly 50%.

Over time, the global internet household penetration rate of less than 10% will start to look more and more like the U.S. household penetration rate of nearly 50%. That implies tremendous member growth potential.

On top of that, because Netflix is so cheap and the content is so good, the company has lots of wiggle room to hike prices without subscriber churn. Thus, there are two huge drivers of growth in the Netflix narrative: massive subscriber growth potential and equally massive price-hike potential.

You can find the nitty gritty math in this article, but this combination of massive user growth and multiple price hikes leads me to believe Netflix can get to $63 billion in total revenues in 10 years. At that point in time, I expect earnings to be around $30 per share.

A market-average earnings multiple of 25 of those $30 earnings implies a 10-year price target on NFLX stock of $750. Discount that back by 10% per year, and you get to a present value of roughly $290.

Bottom Line on Netflix Stock

The recent selloff, which has been driven by external factors largely unrelated to Netflix, has seen NFLX stock plunge into marginally undervalued territory.

If the stock keeps dropping without anything changing in the fundamentals, then NFLX stock could become a screaming buy.

As of this writing, Luke Lango was long FB.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/why-it-may-be-time-to-buy-the-dip-in-netflix-stock/.

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