Many growth stocks are on fire sale these days, presenting a ton of wide-open investing windows. But one of these opportunities stands head, shoulders, torso, and thighs above the rest. I haven't seen a buying opportunity like the current Netflix (NFLX -0.44%) situation since 2011. We're looking at a once-in-a-decade buy signal.
What's going on?
I'm sure you know why Netflix is stuck at the bottom of Wall Street's bargain bin these days. The company set a disappointing guidance target for first-quarter subscriber growth in January and then fell short of that weak target in this week's second-quarter report.
Headlines were quick to declare that Netflix isn't growing anymore, and investors rushed for the exits. The stock fell 40% the next day -- about roughly two weeks' worth of average daily trading volume in a single day.
Netflix shares are now trading at prices not seen since January 2018, nearly 70% below last November's all-time highs. This is the greatest discount I've seen in more than a decade, and the market makers are misinterpreting the exact same stock, again.
How bad is Netflix's slowdown?
Let's put the scary subscriber slowdown into context.
- The company lost 200,000 subscribers from a user base of 221.8 million names. That's a downtick of 0.1% from one quarter to the next, and is still a 6.7% year-over-year increase.
- At the same time, average revenue per membership rose in every region, led by a 20% currency-adjusted gain in Latin America. As a result, top-line sales jumped 10% higher to $7.87 billion.
- Further down the income statement, operating margins and earnings per share exceeded guidance targets by a substantial margin.
It's true that Netflix stands at a crossroads right now. The streaming-video market's low-hanging fruit is in short supply as every media company worth its salt is running its own streaming service. Meanwhile, consumer budgets are under pressure from the ongoing coronavirus pandemic, geopolitical conflicts, and the economic fallout from these central issues.
Therefore, consumer behavior is more unpredictable than usual (which is saying something), at a time when Netflix is shifting its business model into a new gear. Fluctuations in the flow of incoming subscribers should be expected in times like these, especially in the seasonally challenging first half of the year.
Netflix stubbed its proverbial toe, and Wall Street thinks that the company is dying. The subscriber weakness is a temporary speed bump on a long road of fantastic growth, and the business is booming when you put the user growth aside and consider revenue and profit, instead.
History repeats itself
You might still remember the last time Netflix was on sale for all the wrong reasons. That happened at the very start of the digital-streaming era, a period that will forever be known as the Qwikster debacle.
The similarities between the two events are almost hilarious. Eleven years ago, Netflix abandoned the DVD-mailer movie-rental business to refocus on the global-market opportunity of digital video streams. Today, the extreme growth phase of streaming is fading out, so the company has refocused on bottom-line profits with a milder contribution from pure subscriber additions.
The stock charts of the widely separated eras even look quite familiar. Here's how the market ran into a brick wall when Netflix introduced and then renamed the Qwikster idea:
And here's the one-year view from where we stand today:
Need I remind you how Netflix recovered from the plunge in 2011 to crush the market over the next decade-plus? Alright, twist my arm. That chart looks impressive, even if we include today's massive haircut:
This is the time to slam Netflix's "buy" button
Master-investor Warren Buffett says that investors should "be greedy when others are fearful, and be fearful when others are greedy." Netflix investors are quivering in terror right now, even though the long-term prospects of replacing the cable TV and movie industries on a global scale remain as clear as ever.
Netflix is the no-brainer buy of the decade right now, just as it was in the fall of 2011.