Netflix Stock Is Trading at a Historically Low Valuation. Is This a Generational Buying Opportunity?

One of the most basic pieces of investing advice goes something like this: Buy low, sell high. Sounds easy enough, but determining when a stock is at a "low" point is a lot harder than it sounds. Even at rock bottom, a company can keep sinking. And even near all-time highs, it can keep climbing.

One (imperfect) way to figure out when a stock is at a low point is to look at valuation metrics, such as the forward price-to-earnings (P/E) ratio. That brings us to Netflix (NASDAQ:NFLX), a streaming specialist that has been struggling recently and whose forward P/E has declined substantially. Is the stock a buy at current levels?

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Netflix's forward P/E is near 10-year lows

First, let's look into the problems Netflix has faced recently. One of them is lower-than-expected engagement. According to some reports, Netflix users are opening the app and viewing shows less often than before. Management admitted that engagement was behind their own expectations.

During the company's third-quarter earnings call, CFO Spencer Adam Neumann said: "And to be clear, we want to grow view hours faster. We're not satisfied. We're working on it." He stressed that the underlying business remains healthy, but "healthy" isn't good enough for a tech stock valued at higher multiples than its peers. Unless Netflix can boost engagement, the market may not be satisfied, and the stock could continue to decline. But it gets worse.

Netflix recently announced that it is reducing its fiscal year 2026 advertising revenue guidance to $2.7 billion, down from $3 billion. That's not a huge change, but for a company that is already facing various headwinds, it's less than ideal, to say the least. This guidance cut may also be a symptom of a deeper issue Netflix is facing: a lack of engagement. Although, in fairness, management attributed it to a slower-than-expected rollout of some ad product capabilities.

Note that these are just the most recent obstacles the company has encountered. Over the past 18 months, Netflix has also dealt with an increasingly competitive streaming landscape, a failed blockbuster acquisition, and the perception that price increases have become too common.

It's no wonder, then, that the stock price and valuation have fallen as much as they have. Netflix is trading at 17.3x forward earnings, according to some estimates. That's about as low as it has been in a decade and well below the company's 10-year median of 48.4x.

Is there enough fuel for a rebound?

Netflix's third-quarter update wasn't all bad. The company's revenue of $12.9 billion increased 11.8% year over year, matching Wall Street's estimates. Earnings per share jumped 47.5% year over year to $0.87 -- above estimates -- while the company's free cash flow came in at $2.9 billion, up 8% compared to the prior-year quarter. In my view, Netflix remains a great business, but it is now more mature than it was even five years ago.

It makes sense that it is being valued as such. A forward P/E ratio of 48.4, Netflix's 10-year median, is much more characteristic of companies that are still in their growth phases, whereas Netflix is now a mature media company. But does the current valuation accurately reflect Netflix's growth prospects? Note that the company's strategy hasn't changed.

Management wants to double down on original content, which it thinks could help boost engagement. Netflix may also continue to pursue opportunities in corners of the streaming market where it currently lags behind some of its peers.

That includes the sports streaming niche, a particularly attractive market given that recent major sporting events have negatively impacted Netflix's engagement. So, if the company can expand its sports content library, it could meaningfully increase engagement and revenue, both from new subscribers and from advertising. Meanwhile, Netflix remains the leader in streaming by paid subscribers. This large ecosystem is a major strength the company intends to leverage to get back on track.

And Netflix has made important changes, including appointing Peter Rice as chief content officer, a man who has held major leadership positions at other leading media companies.

Netflix looks likely to deal with its headwinds and boost sales growth over the medium term, and there is still a massive market opportunity to tap into in streaming. At current levels, the stock looks more than fairly valued and could generate outstanding returns over the next five years. But I wouldn't call it a generational buying opportunity, at least not yet, given the remaining uncertainty.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.