3 Reasons to Buy Netflix Stock in July
Key Points
Netflix shares have fallen 29% since its last quarterly report, so expectations are low heading into next week's financial update.
Netflix is now trading for less than 20 times next year's earnings, a historical low for a company with a rich history as a premium investment.
With streaming platform operators getting gobbled up, content is king again. Netflix is royalty.
- 10 stocks we like better than Netflix ›
It's not the holiday shopping season, but it's easy to see why Netflix (NASDAQ: NFLX) could feel like Christmas in July right now. Shares of the streaming video pioneer have fallen out of favor, a contrast to the overall rising market.
This could be an opportunity as we head into earnings season. With its highly anticipated second-quarter results now less than 10 days away, Netflix's historically cheap valuation, and several bidding wars for smaller media platforms over the past two years, it could be a good time to binge-invest in the leading premium player.
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1. Love Is Blind: Earnings season is here
There is no single quarterly event that can move a stock as consistently as its earnings release, and investors have been circling the afternoon of July 16 on their calendars for weeks. Netflix will be one of the first consumer-facing businesses to report fresh financials this earnings season, and expectations are modest.
The $12.574 billion that Netflix was modeling for Q2 revenue back in April is a 13.5% increase, its weakest top-line move in more than a year. The $3.327 billion that Netflix sees on the bottom line represents an even more disappointing 6.5% uptick. Slowing revenue growth and contracting operating and net income margins aren't a good look for a company.
The silver lining here is that the stock already took a hit for that uninspiring outlook three months ago. Netflix shares tumbled 10% the day after the company posted weak guidance in mid-April. In a marketplace where tech stocks have been rallying over the past three months, Netflix has traded nearly 30% lower since announcing its poorly received first-quarter results.
Pessimism is already the default setting heading into this critical financial update. When Netflix kept its full-year guidance unchanged after exceeding its earlier first-quarter outlook, it implied a downward revision for the remaining nine months of the year. Things can get worse, but in this depressed case, even holding the line later this month would be worth a victory lap.
2. Stranger Things: The stock is cheaper than you think
Netflix stock hasn't just been a dud over the past three months. The shares are down 41% over the past year. The performance looks even worse when you consider the market has risen 20% in that time.
Stocks don't lose ground in an ascending market by accident. Netflix has made some mistakes. However, put yourself in today's shoes -- instead of kicking yourself for owning the shares over the past painful year -- and the fresh take looks more attractive than it has been in a long time.
Netflix has continued to grow, even as its stock has gone in the other direction. Netflix is now trading at 21 times this year's earnings, and less than 20 times next year's analyst profit target. These might not seem like low multiples, but they are historically cheap. Netflix is trading near its lowest forward and year-ahead P/E ratios in years.
NFLX data by YCharts.
3. Squid Game: Content is worth more than ever now
Tuesday marks the two-year anniversary of the acquisition announcement that would result in the formation of Paramount Skydance. Skydance paying up for the iconic media company wasn't a one-time event. The market has seen two more premium-priced deals for platforms with large streaming audiences since that deal closed last summer.
Netflix isn't likely to be the fourth company to be bought at a premium. It's too big to be bought. However, Netflix has already been a winner of the feeding frenzy. It walked away with a $2.8 billion buyout termination fee earlier this year after an acquisition deal it had struck was wrestled away by none other than Paramount Skydance.
What matters here is that valuations have been reset. Content is king again. If you command a large streaming audience -- and no one has a larger premium audience than Netflix with its roughly 325 million paying households -- you own the gateway to connected TV opportunities and media exposure. Netflix is worth more now than ever, even if the stock chart suggests something else entirely. That's not a problem. That's an opportunity.
Should you buy stock in Netflix right now?
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Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
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