The Nasdaq 100 index is now down roughly 20% across this year's trading, which means it's officially in bear market territory. With inflation coming in hot, the threat of six more major interest rate hikes this year, and geopolitical risk factors creating additional uncertainty, investors have been taking money off the table and selling out of growth-dependent technology stocks at a brisk pace.
With dramatic valuation pullbacks currently underway, there are undoubtedly worthwhile buying opportunities, but investors should still be selective. Read on for a look at which two companies have the dubious honor of being the worst-performing large-cap Nasdaq stocks of the year -- and whether they're worth buying after precipitous sell-offs.
Netflix (NFLX 0.05%) stock was already participating in the marketwide pullback for growth stocks before its latest earnings release, but sell-offs for the stock accelerated dramatically after the company published first-quarter results on April 19. While the company had previously guided for net subscriber additions of 2.5 million in the quarter, it actually wound up losing 200,000 subs in the period.
Net subscriber growth has been one of the most important metrics for Netflix investors, so to see the company post its first subscriber loss since 2011 was shocking and prompted a dramatic reassessment of the company's outlook and valuation.
Despite the company's ballooning content production budget, the dramatic spending increases don't appear to have corresponded neatly with the creation of more "event" television series and movies for the service. Some critics have long held that Netflix has pursued a quantity-over-quality approach to programming, but it was hard to fault that kind of strategy too much when the service was adding new subscribers at a rapid clip. Now, the dynamic seems to be changing considerably.
The streaming landscape has become much more competitive, with Disney's Disney+ service and Warner Bros. Discovery's HBO Max boasting formidable content libraries and attracting subscribers at impressive rates. What's more, both Disney and Warner Bros. Discovery have theatrical and traditional television-based distribution avenues that can generate significant revenue and help justify budgets for the creation of prestige content.
One key question at hand is whether Netflix's business model is busted. Major strategy changes underway suggest that, at least to some extent, the answer to that question is yes. With the company's about-face on implementing an ad-supported service offering and new emphasis on password-sharing as a core concern, the streaming leader is gearing up for a big pivot. Introducing an ad-based service and cracking down on account sharing could wind up being big successes for the business, but investors should keep in mind there are no guarantees on either front.
The other key question at hand is whether Netflix stock is cheap at current levels. With shares down roughly 69% year to date and 73% from the high they hit last year, Netflix stands as the Nasdaq 100's biggest loser in 2022. The stock does look cheap by some metrics, but there are big challenges for the business on the horizon, and I think the index's second-biggest loser this year stands out as a much better buy.
2. PayPal Holdings
Taking second place in the Nasdaq's pantheon of worst-performing large-cap stocks this year is fintech leader PayPal Holdings (PYPL 1.59%).
PayPal stock trades down roughly 56% year to date, and it also trades down roughly 73% from its lifetime high -- a performance that matches that pullback Netflix has seen from its own peak. However, the fintech's big sell-offs seem harder to justify, and its performance outlook appears much rosier compared to the streaming video giant.
With its most recent update, PayPal announced that total payment volume (TPV) conducted through its platforms rose 15% on a currency-adjusted basis to reach $323 billion. Meanwhile, currency-adjusted revenue rose 8%. Non-GAAP (adjusted) earnings per share did fall roughly 28% year over year to $0.88 per share, but the decline isn't terribly concerning when placed in the context of the business's long-term growth potential and current valuation.
While it may be fair to call PayPal a "growth stock," the company actually trades at reasonable valuation multiples. The fintech company has a market capitalization of roughly $96 billion and is priced at approximately 3.3 times this year's expected sales and 18 times expected earnings -- hardly nosebleed levels that should worry investors even in the current, risk-averse climate.
For the full year, management's midpoint guidance calls for currency-adjusted TPV growth of 16%, sales growth of 12%, and a 16% decline for adjusted earnings per share that's significantly milder than Q1's drop. The company also had a cash position of roughly $5.9 billion net of debt at the end of March, and its strong balance sheet should provide some buffer if market sentiment continues to trend bearish.
With category-leading service offerings and attractive avenues to sales and earnings expansion over the long term, PayPal stock looks downright cheap at current prices.