As with most FAANG stocks, shares of Netflix (NFLX) have been under heavy selling pressure, falling more than 11% over the past couple of weeks, dragged down amid the broader tech selloff which has driven the Nasdaq Composite index some 15% below its Aug. 30 peak of 8,133.30.
The way I see it, Netflix shares, which are now down about 36% from their 52-week high of $423, have fallen too far. Despite Netflix’s decline, investors who bought the stock at the beginning of the year are still up some 40% on their investments, besting FAANG peers Facebook (FB), Amazon (AMZN), Apple (AAPL) and Google (GOOG , GOOGL). And there is still room for Netflix shares to move higher into 2019.
Much of the gains will come due to the fact that, despite the company’s size, Netflix is not even close to being a mature business. “Peak subscriber growth” remains a popular bearish argument cited by those who continue to doubt the company. Sure, competition from the likes Hulu, Amazon, Apple will be remain viable threats. And it remains to be seen the extent to which Disney (DIS) can mount a real attack with its streaming platform.
But as we have seen over the past decade, many would-be threats and these so-called “death knells” to Netflix have proved unfounded. The company’s first-mover advantage, which has granted it a growing subscriber base, has proven too great to overcome for new entrants. The company’s negative cash flow has been another popular bearish argument. But, this too, needs to be assessed from the standpoint that Netflix has a strong cash-generating business.
What’s more, the company — which has invested heavily in international markets — is now approaching 140 million global subscribers. This is the most-important metric to focus on, in my opinion. Its growing subscribers serve as the company’s cash pipeline, which can be used to continue reinvesting into content. It’s because of this aspect of the business I believe peak subscriber growth for Netflix remains years away.
That said, it might be true that the company’s U.S. subscriber base may be plateauing. Investors, however, shouldn’t underestimate the massive opportunity Netflix still has on a global scale with respect to its penetration opportunity. And as a value investor, I believe continued subscriber momentum, both domestic and international will be what drives Netflix’s earnings power in 2019.
As such, as Netflix has shown over the past several years by crushing even the most-bullish forecasts, holding the stock through periods of decline has been a profitable trade. In this case, Netflix stock, which earlier this year was valued at 120 times fiscal 2018 consensus profit estimates, is now priced at “only” 64 times forwards.
I say “only” knowing that it is still priced 3.5 times higher than the S&P 500 index. But few S&P 500 companies are projected to grow profits at closed to 60%. I’ll take my chances.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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