Streaming giant Netflix (NASDAQ:NFLX) reported second quarter earnings in mid-July which weren’t all that great and weighed on what has been a red-hot NFLX stock.

The numbers broadly missed expectations. Front and center, a significant slowdown in sub growth in the quarter, coupled with an exceptionally weak guide for sub growth next quarter, implies that the supercharged, Covid-19-inspired streaming TV adoption tailwind — which sparked record-high numbers in the first quarter of 2020 and has sparked an enormous rally in NFLX stock this year to all time highs — has already run its course.

That’s not great news.

So Netflix stock dropped about 10% on the print.

My two cents?

Don’t stress the “bad” earnings report. But do let Netflix stock cool off some more before buying the dip.

Here’s why.

Netflix’s “Bad” Earnings Weren’t All That Bad

Wall Street is freaking out because Netflix’s Covid-19 tailwind has run out of juice.

As it turns out, everyone who wanted to sign up for Netflix during stay-at-home orders did so in the first few months of the pandemic. Throughout March and April, Netflix was adding about 10 million new subs per month. By May, those supercharged growth trends flattened out. In June, Netflix actually lost some subs.

Over the next three months — July, August and September — management is guiding to add less than a million subs a month. That’s a far cry from the 10 million new subs Netflix was adding per month in March and April. More importantly, it’s less than ~2 million new subs per month Netflix added back in July, August and September of 2019.

In other words, it appears that Covid-19 didn’t really add much demand. The pandemic just pulled forward demand. At current trends, Netflix’s total number of subs added in 2020 will be only slightly higher than in 2018 and 2019.

Wall Street thinks that a bad thing. But it’s not really that bad.

Netflix is going “back to normal”. And normal for Netflix — while not “10 million new subs per month” good — is still pretty good.

The company has been and still is the leader in a secular growth streaming TV market, with a rapidly growing international presence, gradually rising unit revenues, quickly expanding profit margin and rapidly scaling profits.

Covid-19 just provided turbulence in those otherwise very strong and stable long-term growth trends. I wouldn’t stress the turbulence. The broader growth trends remain favorable, and that’s what matters.

Netflix Stock is Still Richly Valued

Although I wouldn’t stress Netflix’s bad earnings, I also wouldn’t rush to buy Netflix stock on this post-earnings dip.

Why?

Valuation.

The perception that Covid-19 tailwinds would last forever pushed Netflix stock up into overvalued territory. Now, it’s normalizing lower on the reality that these Covid-19 tailwinds have disappeared.

Unfortunately, this normalization process likely won’t stop at $480.

My base case, long-term model on Netflix assumes:

• The platform continues to add ~25 million to ~30 million new subs per year, on the back of sustained domestic dominance and expanding international reach (which, in turn, is mostly powered by Netflix’s strong and growing international content portfolio), and ultimately grows the sub base to around 500 million subs by 2030.
• Average revenue per user rises, on the back of price hikes and reduced account sharing, towards $15.
• Operating margins — which are still slated to come in at 16% this year and 19% next year — improve to 30%+ with economies of scale and price hikes.
• Earnings per share wind up around $50 by 2030.

Based on an interactive media sector-average 20-times forward earnings multiple, that implies a 2029 price target for Netflix stock of $1,000. Discounted back by my usual 10% discount rate, that equates to a 2020 price target for Netflix stock of $425. Using a recommended 8.5% discount rate (adjusted for today’s record low risk-free rates), that implies a 2020 price target for Netflix stock of $480.

Either way, it’s fair to say that, even after the earnings sell-off, Netflix stock is still slightly overvalued. This slight overvaluation, coupled with easing Covid-19 tailwinds, could pressure shares over the next few weeks.

Bottom Line on NFLX Stock

Long term, I love Netflix stock.

But I understand that Covid-19 tailwinds are moderating, and that shares are slightly overvalued at current levels.

So while I’m not stressing Netflix’s “bad” earnings report, I’m also not rushing to buy the dip.

Instead, the smart move here is to exercise patience. Let Covid-19 hype deflate. Let the stock come down. Then, if shares drop closer to the lower $400 range, double-down and buy the dip.