After a 75% Plunge, Is It Time to Buy Netflix?

On a cool evening in 2011, a tech entrepreneur by the name of Reed Hastings and a friend were soaking in a hot tub in Santa Cruz, California.

Hastings should have been celebrating. His upstart DVD rental business, Netflix (NFLX), was on fire.

In a matter of years, it had gone from a tech startup destroyed by the dot-com crash to a legitimate challenger of Blockbuster in the video rental space. Fourteen million people across the country were paying for its DVD-by-mail service.

By just about any measure you could think of, Netflix was an enormous success. And it was one of the coolest, fastest-growing companies in the world.

Hastings was being anointed as a startup superstar.

Instead of celebrating that night in the hot tub – instead of resting on his laurels – Hastings was already plotting Netflix’s next move … the actual overthrow of his Blockbuster rival.

The idea? Scratch the DVD rental business. And leapfrog Blockbuster. By making Netflix a streaming service.

When he shared the idea that evening, the friend simply said, “That is awful.”

For a while, the friend was right. After the company split apart its DVD and streaming businesses, subscribers weren’t happy. Millions of subscribers quit over the next year, and by 2012, Netflix was on the verge of bankruptcy. Its stock cratered.

But then the world changed. A new generation of consumers, born in the age of the internet, were increasingly attracted to the on-demand convenience and cheap access of Netflix. A few technological paradigm shifts and multiple streaming quality upgrades later, Netflix had taken over the world.

NFLX shares soared like a rocket ship, becoming one of the most owned and legendary stocks in the market. It was the “N” in the famous FANG group of stocks that also included Meta Platforms (META), then known as Facebook, as well as Amazon (AMZN) and Alphabet (GOOG), then known as Google.

NFLX has gained nearly 30,000% in its lifetime. Over the last decade, it has gained 1,340% – and that includes a devastating 75% plunge in early 2022 as it fell from $700 all the way down to the $160s.

It has since doubled off of last year’s lows, so more than many stocks, NFLX begs the question: Is now a buying opportunity at a discounted price? Or are its glory days behind it?

Rating NFLX Today

I’m one of those weirdos that doesn’t watch a whole lot of television, but almost everyone I know mentions Netflix. Whenever there’s a, “Have you seen [name of show]?” it’s almost always followed by, “It’s on Netflix.”

I guess that’s what happens when you have 230 million subscribers.

If you clump together the 45 or so Wall Street analysts who follow Netflix, the average price target is about $361, which is only 7% above the current price. And the range is pretty extraordinary, from a low target of $215 (36% below current prices) to a high of $440 (30% above current prices).

You can see why I devised my own Quantum Edge system and do my own analysis.

My system analyzes over a million data points each day to rate stocks based on their fundamentals, technicals, and Big Money inflows. More than 6,000 stocks receive a Quantum Score between 0 and 100 that measures their health and their potential.

Let’s run NFLX through our Quantum Edge system to see how it rates in the factors most predictive of higher prices.

Overall Quantum Score: 81.0. Scores between 70 and 85 are often outstanding buys. Netflix gets a check mark here.

Fundamental Score: 70.6. I won’t even consider a stock without superior fundamentals, and NFLX’s score here is also strong. One- and three-year sales growth of 6.5% and 16.4% are decent. Earnings growth is even stronger at 25.3% over one year and 39.6% over three years. And the company’s 14.2% profit margin is very good.

The biggest fly in the ointment is debt, which is currently on the high side at 81.5% of equity. Debt is especially important to consider when interest rates are higher because it gets more expensive to service. Netflix offsets that a bit with more than $6 billion cash on hand.

Valuation is okay but not great. Shares trade at 29.5 times expected 2023 earnings, which is reasonable for a growth stock. The price-to-book ratio is rich at 6.3.

Technical Score: 88.2. This is an exceptionally strong score, which is not surprising given the stock’s nearly 60% run over the last six months. It’s still only halfway back to its highs of late 2021, but recent action is positive.

Shares are near their 12- and 52-week highs, trading above key moving averages, and exhibiting good relative strength.

Big Money Flow: As I’m sure you would expect,Netflix historically sees a lot of money coming in. It has generated 98 Big Money buy signals in the last nine years. It has also appeared on my list of the top 20 stocks in the market (which I provide to institutions and hedge funds) 31 times in that same period. That makes it a true outlier in my system with outsized strength and performance.

There were a ton of Big Money sell signals (red bars below) in early 2022 when NFLX got absolutely smashed, but since then we’ve seen only buy signals (green bars) as shares clawed back lost ground.

The last Big Money buy signal was back on Jan. 24, which is a longer pause than I would ideally like to see but also not a cause for concern.

And the Answer Is…

If I look at Netflix through the lens of my life as an infrequent TV watcher, I’m not that excited about it.

But the whole point of my Quantum Edge system is to take emotions and experiences out of the analysis and decide on a stock’s fundamentals, technicals, and Big Money inflows.

And on those counts, Netflix is attractive here.

That 75% wipeout last year may spark a little anxiety, and I get that. Keep in mind that some of that selling was emotional – as shares plummeted people bailed out. Some of the selling was also forced by “margin calls,” which is when brokers demand payment for borrowed money, forcing shares to be sold to produce that money.

And in turn, as NFLX shares fell in value they become a lower weighting in indexes like the S&P 500 and Nasdaq 100, which automatically creates more selling as funds that track any of those indexes rebalance.

The data and my analysis all point to Netflix as a stock with an excellent chance of trading at higher prices in the coming years. If you’re thinking of investing in the stock, consider waiting until after earnings are released next Tuesday, April 18.

If it’s a strong report and shares move higher on big volume, you could buy into strength in a confirmed uptrend. If it’s a weaker-than-expected report and shares fall, you could let the dust settle and then get in at lower prices with bad news already priced in.

Either way, NFLX rates impressively in our Quantum Edge system in all major categories, making it likely that this streaming video giant will make you money in the coming years.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends