Netflix Trades at 21 Times Forward Earnings After Falling 43% From Its High. Here's How That Multiple Compares to Where the Stock Traded the Last 2 Times It Fell This Far.

Netflix (NASDAQ: NFLX) stock is down 43% from its high, something that has happened only twice in the last 15 years.

However, what may be more surprising is how this has affected the stock's valuation. Thanks to the pullback, Netflix trades at a forward earnings multiple of 21. The stock traded at a premium valuation for most of its history and had almost reached a forward P/E of 50 as recently as last fall.

That may also lead investors to wonder what happened following previous pullbacks in Netflix stock, as knowing that could offer insight into when contrarian investors might want to take a chance on the communications stock.

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How Netflix's valuation compares

In 2011, Netflix stock lost more than three-fourths of its value as the company attempted to split up its streaming video and DVD-by-mail businesses. Also around that time, pay-TV network Starz pulled its content from the streaming service. These moves led to significant subscriber losses.

Amid that chaos, Netflix's P/E ratio fell to as low as 14. The stock began recovering as massive growth in streaming hours validated the company's new emphasis on streaming. Also, a content deal with Disney, development of original content, and international expansion helped boost the stock.

Those moves won over investor confidence, and that period of optimism about Netflix persisted until the pandemic-related lockdowns began to end in late 2021. Investors turned on the stock as the service's subscriber numbers fell due to people spending more time outside the home again. Also, intensifying competition from Disney+, Amazon Prime, Warner Bros. Discovery's HBO Max, and other streaming services had led investors to question Netflix's market leadership.

This situation resulted in Netflix's P/E ratio falling to 15. At this point, Netflix regained investor confidence by cracking down on password-sharing and introducing a lower-priced ad-supported tier. These moves helped it bring sustainable profit growth, inspiring investors to bid up the share price.

What should investors do now, according to history?

If history is any indication, a forward P/E ratio of 21 is probably not a bottom signal for Netflix stock.

Admittedly, the company faces challenges that have created uncertainty about its path forward. Slowing revenue and subscriber growth, as well as the loss of the bidding war for Warner Bros. Discovery to Paramount Skydance, seemed to sour investors on the stock.

Also, Alphabet's YouTube has become more of a competitive threat, and management's decision to stop publishing quarterly subscriber numbers makes it more likely that it is hiding challenges with subscriber growth.

Investors also face uncertainties with the stock itself. It is unclear how Netflix will pivot to win back investor confidence.

It is worth noting that Bill Ackman's Pershing Square just initiated a new position in Netflix in Q2, and certainly, the market offers no guarantees that the P/E ratio will fall all the way back to its historical lows. Also, if the company starts making decisions that bring back revenue and subscriber growth, Netflix stock may experience another dramatic recovery.

Still, if you're taking your cues from history, now is probably not the time to buy.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.