Streaming giant Netflix (NASDAQ:NFLX) reported blowout third-quarter numbers on Tuesday, Oct. 16, that underscored one overarching theme: Netflix is taking over the global entertainment industry.

In other words, nothing about the Netflix narrative is slowing. Revenue growth isn’t slowing. Domestic subscriber growth isn’t slowing. International subscriber growth isn’t slowing. Margin expansion isn’t slowing. Profit growth isn’t slowing. Overall, Netflix is simply marching at a consistent pace toward global domination of the entertainment industry. The market applauded the report, and Netflix stock popped as much as 10%.

But, the gains didn’t last. As of this writing, NFLX stock is up only 3.5%.

In the big picture, Netflix’s quarter was good. The stock should’ve popped after the print. But, the post-earnings pop sent shares toward $400, and up at those levels, the valuation on Netflix stock becomes tough to justify, even with aggressive assumptions. As such, investors faded the rally, and Netflix stock dropped. It currently sits at $360.

Now what? If Netflix stock keeps dropping, take advantage of the weakness. But, there is no rush to buy Netflix stock at $360 until recent volatility settles.

NFLX’s Quarter Was Great

Everything about Netflix’s quarter was great, and that is because every core operating metric stayed on a robust growth trajectory.

Total subscriber growth was 25%. Over the past several quarters, subscriber growth has run between 25% and 27%. Domestic subscriber growth was 11%. That metric has run between 10% and 12% over the past several quarters. International subscriber growth 39%, versus 39% to 44% growth rates over the past few quarters. Total revenue growth came in at 36%. Revenue growth has hovered around 33% to 43% over the past several quarters. And ASPs, margins and earnings all continued to improve dramatically.

In other words, everything is still going right for Netflix. Thanks to a robust and diverse original content portfolio, Netflix is becoming a must-have entertainment option around the world. That is why subscriber growth isn’t slowing and continues to defy the law of larger numbers. Meanwhile, consumers are willing to pay up for this content, so ASPs are rising and providing an additional tailwind for revenue growth. Higher ASPs and more subs are also exceptionally additive to margins, considering this is largely a fixed cost business.

Overall, Netflix’s third-quarter print was great, and it proved that Netflix’s growth narrative remains as robust as ever. This company is indeed marching toward world domination, and as it does, margins and profits are moving higher by a bunch. This combination of robust market expansion and profit growth justifies the premium valuation on Netflix stock.

Buying Netflix Stock Is Tough to Justify At $400

While a premium valuation is warranted for NFLX stock, the valuation still needs to remain within reason. After the third-quarter print, the stock popped to prices above $400. The valuation on NFLX at those levels isn’t within reason.

I’ve always looked at Netflix as a streaming platform with the potential to get 350 million households globally paying $15 per month for the Netflix service. Under those assumptions, we are talking about $63 billion in revenue at maturation. Also at that point in time, I expect operating margins to stabilize around 30%. Putting those two together, I optimistically see Netflix doing about $32.50 in earnings-per-share at maturation (within the decade).

But, even that huge earnings base in a decade doesn’t justify a $400 price tag today. Best case scenario, Netflix gets a Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) type multiple in a decade, which implies a forward multiple of 25. A 25 forward multiple on $32.50 in 2027 earnings implies a 2026 price target of over $800. Discounted back by 10% per year, that equates to a 2018 price target of $380.

Thus, best case, I think Netflix stock trends toward $380 by year end.

NFLX stock currently sits below that level. Time to buy the dip? Perhaps. But, patience is critical, and it might be wise to wait for all this volatility to settle before coming back in at prices below $380.

Bottom Line on NFLX Stock

It was a great quarter from a great company. But, valuation matters, and Netflix stock popped to valuation levels that were unreasonable. Now, the stock is settling back down. If this stock settles materially below $380, I think the buy thesis looks compelling.

As of this writing, Luke Lango was long GOOG.