Netflix Is Down 42% From Its High. History Says This Is the Setup to Watch.

It's been a rough year and change for Netflix (NASDAQ: NFLX). The company behind the world's most popular premium streaming platform entered this week trading 42% below the all-time high the shares notched 14 months ago.

There are some good reasons for the market keeping Netflix in check. Just three quarters after posting its strongest revenue growth in four years -- an 18% year-over-year jump for last year's holiday quarter -- revenue decelerated to 16% and 13% in subsequent reports. Its guidance for the current quarter calls for an 11.7% step-up for the period ending next month, its weakest showing in almost three years.

Momentum is not on the side of Netflix bulls, but investors have been here before. Let's take a closer look at what history shows us about sharp sell-offs in Netflix stock.

Image source: Getty Images.

Are you still watching?

A 42% drawdown is rough, but it's child's play compared to the many pullbacks in the past. Netflix shares have been volatile throughout its 24 years of trading.

• Like many growth stocks that surged in the early days of the post-pandemic recovery -- only to crash in 2022 -- Netflix shares plummeted 77% in just six months following what was then an all-time split-adjusted high of $70.10.
• Remember the Qwikster fiasco of 2011? The market was not pleased with Netflix's plans to go all-in on streaming. Spinning off its flagship business of disc-based rentals by mail under the new Qwikster moniker was widely lampooned until Netflix reversed that decision. Its credibility was shot, even if history taught us it was the right call. The shares would go on to fall 83% from their then all-time split-adjusted peak of $4.35 by the time they bottomed out in the summer of 2012.

There's a point worth making about these two much larger sell-offs: The stock hit all-time highs in both cases before the brutal downticks, just as we were last year. In both cases, Netflix would recover so swiftly that it declared huge stock splits -- 7-for-1 in 2015 and 10-for-1 in 2025 -- three years after hitting rock bottom.

There's always something good on Netflix

The market has had it out for Netflix over the past year. It didn't like Netflix being the winning bidder for Warner Bros. Discovery. And it didn't like Netflix when someone else swiped Warner Bros. Discovery away with a higher bid.

Last month's downticks after a disappointing second quarter are justified, but history is kind to patient investors who endure drawdowns. As a bonus, Netflix is now cheaper than it has been on a valuation basis for some time aside from the 2022 bottom. You can buy Netflix today for just 20 times next year's analyst profit target.

There are no guarantees that Netflix will spring back soon, just as there are no assurances that this is the bottom. The odds are long that there will be another stock split three years from now.

However, Netflix has a history of bouncing back from much larger momentum droughts. I continue to hold my Netflix shares.

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.