Netflix (NASDAQ:NFLX) — alongside the rest of the tech sector — has been absolutely crushed in September, with shares of NFLX stock falling nearly 20% from their early September highs.
While this sell-off was overdue — in early September, Netflix stock was both too hot and too richly valued for its own good — the sell-off has now come too far.
It’s time to start buying the dip in NFLX stock, mostly because Netflix’s long-term fundamentals remain solid, near-term growth trends in the streaming TV industry project to remain favorable and the valuation on the stock has now corrected back into fair territory.
Here’s a deeper look.
Long-Term Fundamentals and NFLX Stock
In the month of September, nothing has changed about the long-term fundamentals underlying NFLX stock. The world is still pivoting from linear TV to streaming TV, thanks to streaming TV’s huge price and convenience advantages over linear TV.
Netflix is still the runaway leader in the streaming TV world, and continues to pump out hit TV show after hit TV show (the most recent batch of hits includes a second season of Umbrella Academy, a third and final season of Dark, and the ultra-relevant documentary The Social Dilemma).
The opportunity for sustained, huge long-term revenue growth remains robust, behind big sub growth and continued price hikes. The outlook for that big revenue growth to turn into even bigger profit growth through economies of scale is also still highly favorable.
All in all, with Netflix, you still have the global streaming TV leader with huge long-term growth prospects.
None of that has changed in the past two weeks.
The only thing that has changed is the NFLX stock price.
Near-Term Growth Trends are Favorable
There’s some concern out there that — as consumer behavior normalizes in the coming quarters and we stop staying inside all the time — Netflix’s subscriber growth numbers will moderate. That may happen.
There’s also concern that Netflix’s recent controversial film Cuties is causing elevated levels of subscriber churn. That is happening.
But, to both of those points, my question is: so what?
These aren’t big enough headwinds to slow the secular shift of consumers from streaming TV to linear TV, nor are they big enough headwinds to unseat Netflix as the unparalleled leader in the streaming TV market.
Instead, so long as Netflix remains cheaper than cable (still true) and Netflix continues to produce awesome content (also still true), consumers will continue to flock to the Netflix platform.
Netflix’s subscriber numbers will remain generally strong, and NFLX stock will stay on an uptrend.
Netflix Stock Is Fairly Valued
The best reason to start buying the dip in NFLX stock here is that the stock is now reasonably undervalued.
I’ve long held the belief that Netflix is marching towards 500 million subscribers at scale, that the company will continue to leverage superior content to hike prices towards $15 per month without much churn, and that profit margins will expand meaningfully towards 30%-plus thanks to economies of scale (a majority of Netflix’s expenses are fixed, and will not rise meaningfully with more subscribers).
Under those beliefs, my modeling suggests that Netflix will do about $50 in earnings per share by 2030.
Based on a 20-times forward earnings multiple, that implies a 2029 price target for NFLX stock of $1,000. Discounted back by 8.5% per year, that implies a 2020 price target for NFLX stock of $480.
So, two weeks ago, Netflix stock was overvalued. Now it’s undervalued.
Bottom Line on NFLX Stock
Netflix stock looks like a compelling buy amid recent weakness across the entire tech sector because, well, because this is Netflix.
Don’t overcomplicate things. Netflix is still the world’s leading streaming TV platform by a mile at a time when everyone is pivoting more rapidly than ever to the streaming TV channel.
That means NFLX stock is a long-term winner. And now that this long-term winner is trading at a discount to fair value, it’s time to buy the dip.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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