Shares of Netflix (NFLX 0.09%) have tumbled nearly 40% after hitting an all-time high of $700.99 last November. Most of that decline occurred after the stock posted a mixed fourth-quarter earnings report on Jan. 20.
I recently examined the five red flags that weighed down the stock: its decelerating growth in paid subscribers in a post-lockdown market, its comments about the competition, its negative free cash flow, its growing dependence on lower-revenue overseas users, and its high valuation.
But today, I'll examine the five green flags that investors might have overlooked -- and if they make Netflix a more worthwhile investment.
Image source: Getty Images.
1. Netflix's shows are still topping the charts
Nielsen's latest streaming ratings, which compare the U.S. viewership of Netflix, Disney's (DIS 0.76%) Disney+ and Hulu, Apple TV+, and Amazon Prime Video, indicate that Netflix remains far ahead of its closest competitors.
Between Dec. 27 and Jan. 2, Netflix's Cobra Kai was the most-streamed show at 2.423 billion minutes for the full week. That put it ahead of the new Disney+ animated movie Encanto (2.198 billion minutes) as well as Netflix's own high-profile film Don't Look Up (2.024 billion minutes).
Netflix's The Witcher and Emily in Paris ranked fourth and fifth, respectively, at 1.827 billion minutes and 1.11 billion minutes. In total, Netflix claimed eight of Nielsen's top 10 streaming spots, which suggests the bearish concerns about the competition might be overblown.
2. Reed Hastings' big buy
Shortly after Netflix's post-earnings plunge, co-CEO Reed Hastings scooped up 51,440 shares at prices ranging from $376.43 to $393.55 for approximately $20 million. Those purchases increased Hastings' total stake to 5.16 million shares, which are worth about $2.2 billion at the time of this writing.
Hastings' big buy only represented 1% of his total Netflix holdings, but some investors interpreted the move as a clear vote of confidence in the company. Nonetheless, Netflix insiders still sold nearly three times as many shares as they purchased over the past three months.
3. Bill Ackman's big buy
Bill Ackman's Pershing Square bought 3.1 million shares of Netflix in late January, making it one of the company's top 20 stakeholders. In a letter to Pershing's investors, Ackman said Netflix's subscription-based revenue still had "enormous future growth potential," and that it had plenty of pricing power to boost its margins and free cash flow.
Pershing Square's big purchase is notable, since the hedge fund management company primarily focuses on value investing and didn't previously own any shares of Netflix. That vote of confidence suggests that the stock could be getting undervalued at about 30 times forward earnings.
4. Wall Street turns bullish again
Shortly after Hastings and Ackman made their big purchases, two prolific Wall Street analysts turned bullish on the stock again. Edward Jones analyst David Heger upgraded Netflix from hold to buy, while Citi analyst Jason Bazinet upgraded the stock from neutral to buy (but reduced his price target from $595 to $450).
Investors should take those ever-shifting estimates with a grain of salt, but they indicate that a growing number of investors are considering Netflix's post-earnings pullback to be an attractive buying opportunity.
5. The global streaming video market is still growing
Lastly, Netflix remains the world's largest paid streaming-video platform with 221.8 million subscribers. Meanwhile, the global streaming video market could still expand at a compound annual growth rate (CAGR) of 21% between 2021 and 2030, according to market researcher Report Ocean.
Netflix might grow at a slower rate than smaller streaming platforms. But even if it trails the broader market with a CAGR of 15%, its annual revenue could still rise from $29.7 billion in 2021 to over $100 billion in 2030. Simply put, Netflix already serves a big audience that could become even bigger as income levels and internet penetration increase across the world.
But do these green flags make Netflix a better investment?
These green flags all suggest that Netflix's post-earnings plunge to about $360 per share was a good buying opportunity. However, I think Netflix is still the least attractive FAANG stock because it faces significantly more competition than the other four tech giants.
Alphabet, in particular, seems like a more reasonably valued way to profit from the long-term expansion of the advertising, streaming, and cloud markets at just 23 times forward earnings. So for now, I'd rather stick with other tech stocks, especially those with higher margins and stronger cash flow growth, instead of rolling the dice on Netflix's post-lockdown stabilization.
