This year has not been kind to most tech stocks. The Nasdaq Composite was down a brutal 28% through mid-December, and many of its members posted even worse results.
Some of those slumps made sense given the rapidly declining earnings prospects in niches like digital advertising and e-commerce. But Wall Street also sold off high-performing, profitable stocks.
With that backdrop in mind, let's look at some reasons to buy Netflix (NFLX 1.73%) shares right now following the streaming video giant's drop of over 50% so far in 2022.
Image source: Getty Images.
Growth is back
The biggest knock against Netflix stock through mid-2022 was that growth had hit a wall. The company reported its first ever back-to-back period of quarterly subscriber losses, in fact. Part of the pressure came from a growth hangover compared to soaring demand for digital entertainment in early phases of the pandemic. But part of it reflected a tougher competitive environment as rival streaming services gained ground against the leader.
The challenge isn't as bad as investors had feared, though. Netflix returned to growth in Q3, and management projected a gain of over 4 million subscribers for the current Q4 period. The company demonstrated its ability to generate global buzz with its record hit Wednesday, which might propel Netflix to another modest subscriber beat when the company announces Q4 results in late January.
Competition is shifting
The competitive environment has also improved. A year ago, companies like Disney (DIS -0.12%) were happy to lose money on their streaming services as they fought for more subscribers. That era of free spending seems to be over now, though. Disney raised its prices and has signaled a shift in its growth model to prioritize profits.
Other rivals are making similar moves, which reduces pricing pressure on Netflix. The company should be able to expand more easily now that competitors are holding themselves to higher standards of profitability. "We believe we're on a path to reaccelerate growth," executives said back in mid-October, even before Disney rolled out its higher prices.
Netflix is profitable
Netflix has posted three consecutive quarters of positive cash flow despite huge headwinds like the strengthening U.S. dollar and weaker growth in early 2022. The long-term outlook is bright on this score. Executives are targeting double-digit annual revenue growth, expanding profit margins, and accelerating free cash flow growth over the next several years.
Netflix's operating profit margin fell to 19% of sales this past quarter compared to 25% a year ago. But that slump was entirely due to currency exchange rate shifts. Netflix is also more profitable than industry peers, which makes sense given its lead in the industry and its unique scale when it comes to its selling footprint and its annual content budget.
NFLX Operating Margin (TTM) data by YCharts
The stock's 2022 decline makes some sense because Netflix's growth rate has slowed sharply from the over-20% level that investors were celebrating through the past few years. The Q4 increase should be just 1%, after all, if you believe executives' latest forecast.
But look behind that number and you'll see reasons for optimism as Netflix reaccelerates membership growth, wins market share, and steadily expands profitability. That's a recipe for market-beating returns, especially when you consider that the stock price was cut in half through 2022.
