Why Netflix Stock Rallied Today
Key Points
Bill Ackman's Pershing Square Capital has taken a sizeable stake in Netflix.
The company's double-digit revenue growth, expanding profitability, and compelling valuation make it an attractive opportunity.
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Shares of Netflix (NASDAQ: NFLX) charged sharply higher Thursday morning, climbing as much as 4.7%. As of 11:30 a.m. ET, the stock was still up 3.52%.
The streaming video specialist got a vote of confidence from one of the world's most notable hedge funds.
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A "substantial discount"
Word broke late yesterday that Pershing Square Capital Management, helmed by billionaire Bill Ackman, had taken a new, sizable stake in Netflix. In its quarterly shareholder letter, the hedge fund disclosed a 4.9% stake in the streaming giant. Pershing is known for owning just a few companies at a time -- usually less than a dozen -- and taking sizable positions.
Beyond the purchase itself, the commentary explaining it was what got investors excited. Since the hedge fund exited its previous position in early 2022, "Netflix has since effectively won the streaming wars," Pershing wrote.
"We expect Netflix to compound revenue at a double-digit growth rate, with content costs growing more slowly than revenue, driving continued margin expansion ... the company's current valuation multiple represents a substantial discount." The statement went on to say that it was "highly attractive in terms of business quality and prospective earnings growth."
There's no arguing with Ackman's logic. Netflix stock is currently down 42% from its peak last year, as its now-defunct attempt to acquire Warner Bros. Discovery, rumors of other failed acquisition attempts, and concerns about engagement have given some investors pause.
That hasn't stopped Netflix from pulling a number of levers to improve its position. The expansion of live sporting events is attracting a new generation of viewers, and the company's lower-cost advertising tier -- which expands Netflix's addressable market to more price-sensitive viewers -- is on track to surpass $3 billion in revenue this year.
On the bright side, the stock now sells at just 24 times earnings, well below its three-year average multiple of 43. That's an attractive price for a company with a track record of double-digit revenue growth and expanding profitability.
Taken together, these factors illustrate why Netflix is an underappreciated bargain. Investors would do well to follow Ackman's example and pick up shares of the streaming leader while they're on sale.
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Danny Vena, CPA has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
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