Cathie Wood Buys the Netflix Dip: Should You?

Growth investor Cathie Wood was surprisingly quiet last week, as the market raced to new highs. She lightened her stake on a pair of positions across her Ark Invest ETFs on Monday. She didn't make any trades on Tuesday or Wednesday. She pared back on a single holding on Thursday. It wasn't until Friday that Wood actually bought something, and Netflix (NASDAQ: NFLX) was one of just two existing positions that she added to on the final trading day of last week.

With Netflix shares plummeting nearly 10% on an otherwise buoyant trading day, Friday's price action stands out. Many aggressive growth investors prefer to buy stocks on the way up, but Wood doesn't usually behave like a momentum investor. Ark Invest often adds to positions on down days, even though the other stock she bought on Friday was a biotech soaring nearly 30% by the closing bell.

Is Wood's contrarian stance on Netflix the right call? Let's take a look at some of the reasons why she could be wrong. I'll follow up with some reasons why investing in Netflix might be a smart thing to do.

Image source: Getty Images.

Knock on Wood

On the surface, Thursday afternoon's fourth-quarter results were a blowout. The 16% increase in revenue through the first three months of this year was just ahead of the 15% that Netflix was targeting. Earnings soared 83% to $5.3 billion -- or $1.23 a share -- landing well ahead of what analysts and Netflix itself were modeling.

The numbers may look decent, but this wasn't a good report. It wasn't even a ho-hum report. Revenue rose just 14% on a foreign-exchange neutral basis. Was it really a top-line beat or just the lucky break of being on the right side of a weakening U.S. dollar over the past year?

The bottom-line beat is even more worthy of an asterisk. When Netflix initiated its first-quarter guidance in January, it didn't expect to be on the receiving end of a $2.8 billion payment from Warner Bros. Discovery (NASDAQ: WBD) as a buyout termination fee. The windfall after taxes inflated the quarterly performance.

Two other dings in the report were more obvious. Guidance was disappointing. Netflix didn't boost its full-year outlook, despite exceeding its first-quarter forecast and raising monthly subscription prices for U.S. users last month. The second-quarter guidance it initiated was another buzzkill, as the 13.5% year-over-year increase in revenue would be its weakest top-line gain over the past year. Its bottom-line outlook was short of Wall Street's profit target. With domestic prices rising in late March, the sting is particularly harsh.

Another setback in the report was news that founder and chairman Reed Hastings won't run for board reelection at June's annual shareholder meeting. The former CEO generated generational wealth for early investors in the company. Naturally, he was no longer involved in day-to-day operations, but his departure still stings.

Buying the dip

One could argue that the stock's dip was foreshadowed by the titles of some of its hottest shows. Big Mistakes, Trust Me: The False Prophet, and Something Very Bad is Going to Happen are among its most-streamed shows in April.

Seriously, though, Cathie Wood adding to Ark Invest's Netflix position could be a winning decision. Netflix stock is essentially where it was a year ago. In that time, revenue has accelerated to its strongest trailing growth in four years. It dodged a bullet -- and got paid handsomely -- for walking away from overpaying for Warner Bros. Discovery.

The stock isn't textbook cheap. Netflix is trading for 25 times next year's earnings. However, the platform has proven its all-weather resiliency. Revenue has risen at least 6% in each of its first two dozen years as a public company, with double-digit percentage jumps in 22 of those 24 years. The streak may end this year, but revenue has accelerated in each of the last three years.

Netflix has positioned itself well to make the most of its viewers' flinching at its almost-annual price hikes. Its cheaper ad-supported tiers are booming in popularity, and Netflix expects ad revenue to double in 2026. With consumer concerns about geopolitical upheavals and rising gas prices, staying at home and watching a show on the world's most popular streaming service sounds like a pretty good value proposition.

Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.