Netflix (NASDAQ:NFLX) stock has been on fire in 2020, rising 60% year-to-date – versus a 4% gain for the S&P 500 – on the back of the novel coronavirus pandemic forcing consumers inside and promoting more widespread adoption of streaming services like Netflix.
But the pace of these gains slowed recently. Specifically, over the past month as consumers started to go back outside again, Netflix stock started to under-perform the market.
Since early July, NFLX stock is up 6%. The S&P 500 is up 7%.
Some pundits believe this under-performance is just the beginning of the long NFLX trade unwinding as consumer behavior normalization acts as a headwind for global streaming service adoption.
That’s an unnecessarily short-sighted viewpoint.
In the big picture, the pivot from linear TV to streaming TV will live on longer after Covid-19 and its related effects pass, and Netflix will sustain huge growth over the next five to 10 years.
So, when it comes to NFLX stock, patience is your best friend. Let the stock chop as traders play the short-term game. Ignore the cop. Buy on weakness. And let long-term tailwinds drive the share price way higher over the next decade.
Here’s a deeper look.
Netflix Is a Long-Term Winner
Forget Covid-19 for a moment. Netflix was a big winner before the pandemic emerged. It will remain a big winner long after the pandemic passes, too.
The reality is that Netflix created the best entertainment platform in the planet – at a price anyone can afford – and this entertainment platform will reach global ubiquity over the next five to 10 years.
Just think about the Netflix platform for a moment. In every way imaginable, it’s better than everything else out there.
It’s technologically superior. Because Netflix has been in the streaming game for so long – and because they’ve thrown so many resources and engineers at optimizing streaming – the platform has the best streaming visual media quality in the world. Remember when Disney+ launched and it had a bunch of glitches? Netflix doesn’t have those glitches. Ever.
Netflix is also far more convenient than every other movie/TV entertainment platform. Of course, it beats everything linear TV, since Netflix is on-demand. But it also beats all other streaming platforms, again because superior technology has granted Netflix superior capabilities, including the ability to download and play content offline.
Netflix also has the best content. Thanks to its huge database which comprises the viewing habits of nearly 200 million global households – and its seemingly unlimited budget – Netflix consistently makes some of the most widely watched and critically acclaimed original movies and TV shows. And Netflix makes a bunch of them. So much that you could have a new Netflix show/movie to watch every single day.
Netflix offers all of that – best-in-market technology, best-in-market convenience and best-in-market content – for less than $15 per month.
If there were ever a recipe for global ubiquity, this is it. The world’s best product, at a price everyone can afford, at a time when everyone is pivoting to adopting streaming services.
It’s easy to see Netflix is a long-term winner.
NFLX Stock Is a Buy on Dips
Given Netflix’s favorable long-term growth prospects, Netflix stock is a buy on future dips.
Here are my numbers on Netflix:
- The platform grows to 500 million global subscribers by 2030, meaning Netflix will – according to my assumptions – be in one out of every three internet households globally by the end of the decade.
- Average monthly revenue per user rises toward $15, powered by price hikes and a crackdown on account sharing.
- Revenues scale to $90 billion.
- Gross margins rise to ~50%. The opex rate drops to ~20%. Operating margins stabilize long-term around 30%, which is roughly average for a software entertainment company.
- Earnings per share expand to $50 by 2030.
- Based on an interactive media 20-times forward earnings multiple, that implies a $1,000 price target for NFLX stock by 2029.
- Discounted back by 8.5% per year, that equates to a 2020 price target of $480.
So, by my numbers, NFLX stock is slightly overvalued in the near-term.
But, because Netflix stock has such robust visibility to huge gains in the long run, this slight near-term overvaluation isn’t scary. Instead, all it means is you probably shouldn’t chase the rally here. Let the traders flip the stock over the next few months. Let Covid-19 headwinds swing the stock around.
Buy on dips toward and below $480. Hold all the way to $1,000 in the long run.
Bottom Line on NFLX Stock
Netflix stock is a long-term winner. Shares are just slightly overvalued today because of Covid-19 hype.
That hype is bound to fade over the next few months as consumer behavior normalizes, and we all spend less time glued to streaming services. As that hype fades, NFLX stock may come under pressure.
If it does, buy the dip. The stock looks particularly attractive on dips below $480.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NFLX.
