Although Netflix (NFLX -0.20%) shares are up 45% over the past six months, a far higher return than the Nasdaq Composite's 13% gain during that time, the global entertainment leader's stock is still selling at a sharp discount to its all-time high. And this might mean that many investors are looking to add the business to their portfolios.
This top streaming stock definitely has a compelling bullish thesis that's worth taking the time to thoroughly understand. With that being said, is Netflix a buy right now? Let's take a closer look.
Posting healthy growth in an uncertain environment
After adding 37 million subscribers in 2020 and 18 million in 2021, Netflix's operations hit a rough patch last year. The business did acquire roughly 9 million net new customers in 2022, bringing the total to roughly 231 million, but this included a loss of 1.2 million members in the first six months last year, sparking fears within the investment community that this company's growth days were in the rearview mirror.
Nonetheless, revenue was up 6.5% in 2022, a respectable gain given the deteriorating economic conditions, which were spurred by high inflation and swiftly rising interest rates. In fact, Netflix's growth last year should ease shareholder concerns when you take into account the normalization of consumer behavior. The company benefited tremendously during shelter-in-place orders throughout the depths of the pandemic. And it has added on top of these gains, even as consumers venture back out and spend on travel and other leisure activities.
Going forward, management won't provide any more guidance on subscriber additions, but executives do expect sales to jump 4% year over year in the first quarter of 2023, with an operating margin of 20% during the period. But the long-term objective hasn't changed, and that is to increase revenue by double digits, expand the operating margin, and drive free cash flow (FCF) generation.
Moreover, many of Netflix's rivals are struggling with trying to find financial stability, and reaching profitability is a top priority these days. Walt Disney's direct-to-consumer segment, which houses the company's streaming services, posted a whopping operating loss of over $1 billion in the last fiscal quarter. CEO Bob Iger hopes Disney+ can achieve profitability by fiscal 2024. To its credit, Netflix is firmly profitable on an accounting basis. And even more exciting, it's projected to produce $3 billion of FCF this year, up from $1.6 billion last year. That's a wonderful place for the business to be in.
Investors must also consider Netflix's valuation. With the stock down 51% from its November 2021 peak, shares are now trading at a price-to-earnings ratio of 34, meaningfully below the trailing five- and 10-year averages. As a global leader with a strong financial position in a huge market that favors companies with a first-mover advantage, this might be a good time to scoop up Netflix shares.
But there's a key reason to sell Netflix stock
Netflix certainly possesses lots of favorable characteristics that might warrant adding the top streaming stock to one's portfolio. After all, it is the leading service in the industry, one that is slated to continue benefiting from the broad secular trend away from cable TV and toward streaming entertainment. In December, Netflix only accounted for 8% of TV viewing time in the U.S., a figure management believes will be much higher in the future, providing a long expansionary runway.
However, I think there is one critical issue that investors should also be thinking about, which is the possibility of subpar expansion in the years ahead. The company's subscriber and revenue growth in 2022 was clearly a dramatic slowdown from the results that investors have been accustomed to for most of the past decade, and this could be a potential warning sign of what's to come.
The streaming and media landscape has never been more intensely competitive. As a consumer, there are really an unlimited number of entertainment options to choose from. What's more, the 74 million customers combined in the U.S. and Canada is down from the total in the year-ago period. Consequently, Netflix could be reaching a saturation point in its two most developed and lucrative markets.
All of this is to say that the competitive environment isn't what it was for most of the 2010s, when Netflix was experiencing rapid expansion. Therefore, investors might need to temper their expectations moving forward.
