Netflix Trades at a Discount to the S&P 500's Valuation. Is It Deserved?

So this is the timeline we're living in right now. Netflix (NASDAQ: NFLX) has historically traded at a premium to the market. The world's largest premium video streaming service -- with more than 300 million paying subscribers worldwide -- is trading at an earnings multiple in the teens.

You can buy Netflix for 19 times trailing earnings and less than 17 times -- 16.5, to be exact -- next year's profit target. In the other corner, the S&P 500 (SNPINDEX: ^GSPC) is trading for 25 times trailing earnings and 18 times next year's net income expectations.

Is this an opportunity for investors in the streaming company that has been a 520-bagger since going public 24 years ago? Is this one of the few times that someone has mentioned Netflix and "value trap" in the same sentence? Let's take a closer look at how we got here, before wondering if Netflix merits a rare market discount.

Image source: Getty Images.

Screen there, done that

As a longtime Netflix shareholder, I have tasted the highs. I have swallowed the lows. This is one of the swallows. Shares of Netflix hit another two-year low last week. The stock has fallen 54% from the all-time high it reached in June of last year.

Revenue growth has decelerated for three consecutive quarters. Its top-line guidance suggests the streak will extend to four when it reports again in January. Perhaps the most disheartening run is that Netflix has initially moved lower after each of its last six earnings reports.

The first few times, it was a matter of a richly priced stock posting good rather than great financial results. Lately it's been a string of disappointing guidance updates. Last month's update was particularly toasty, with layoffs announced just ahead of the report. You could say the company that inspired binge viewing isn't exactly binge hiring these days.

Been there, won that

There's some good news as you walk through the ruins. Netflix stock has been through this before. The 54% peak-to-trough investors are experiencing today pales in comparison to the drawdowns following the 2011 Qwikster fiasco and the 2022 growth-stock sell-off.

The stock fell roughly 80% in both cases, only to soar more than fivefold to make that back -- and then some -- in just a couple of years. This doesn't mean that Netflix doesn't need to earn this recovery. The marketplace has evolved amid stronger, now-profitable streaming competition.

Naturally, I still like Netflix's chances here. I'm still a shareholder. The valuation is near historic lows. Analysts see Netflix continuing to post revenue growth in the low double digits. Margins will be pressured next year, but looking out to 2028 and 2029, the stock is now trading for less than 14 and 12 times earnings, respectively.

I understand why Netflix has fallen out of favor. Do I think the discount to the S&P 500 is warranted? No. I do not.

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