4 Reasons to Buy Netflix Stock, and 1 Reason to Sell

Netflix (NFLX -0.13%) has taken investors on a wild ride over the past two years. The streaming media giant's shares surged during the buying frenzy in growth stocks and closed at an all-time high of $691.69 on Nov. 17, 2021.

However, Netflix's stock plummeted to a multiyear low of $164.28 on June 14, 2022, as its growth decelerated, it lost subscribers for the first time in over a decade, and rising interest rates deflated its valuations. But after sinking to that nadir, Netflix's stock more than doubled to about $380 over the past year.

Is it finally safe to buy Netflix's stock after those massive price swings? Let's review four reasons to buy Netflix and one reason to sell it -- to see whether it's still a good investment.

Image source: Getty Images.

1. Netflix's stabilizing growth rates

When Netflix lost paid subscribers in the second quarter of 2022, it finally admitted that it was facing stiff competition from other streaming media platforms. That warning convinced the bears that Netflix's high-growth days were over, and its growth would stall out as fierce competitors like Disney, Amazon, Warner Bros. Discovery, and Paramount carved up the market. But if we look at Netflix's growth over the past year, we'll see it actually gained subscribers again, and its revenue growth stabilized.

Data source: Netflix. YOY = year over year.

That stabilization can be attributed to three factors. First, it lapped its pandemic-induced growth spurt in 2020 and a post-pandemic slowdown in 2021. Second, it overcame the initial shock from Russia's invasion of Ukraine (which drove its loss of subscribers in the second quarter of 2022) over the following three quarters.

Lastly, it attracted new viewers with original hit shows like You, Outer Banks, and Ginny & Georgia, proving it could continue expanding without relying on established franchises.

2. The expansion of its advertising business

Netflix has traditionally generated most of its revenues by charging subscription fees for ad-free programming. But that changed last November when it launched its cheaper ad-supported tier across a dozen markets.

This ad-supported tier could help Netflix attract more budget-conscious consumers while widening its moat against similar ad-supported tiers at Disney+, WBD's HBO Max, and Paramount+. It could also attract more advertisers and diversify its top line away from its ad-free subscription fees.

Netflix hasn't disclosed any revenue figures from its new ad-supported tier yet, but it recently revealed it had nearly five million monthly active users. That would only account for about 2% of its paid subscribers, but that ratio could climb as Netflix launches the tier in additional markets.

Based on eMarketer's projections, ad spending on connected TV (CTV) ads in the U.S. could more than double from $21.2 billion in 2022 to $43.6 billion in 2026 -- and Netflix will likely benefit from that secular boom.

3. Its crackdown on shared passwords

For years, Netflix looked the other way toward password sharers. But this year, it finally cracked down on the practice by charging extra fees for shared passwords. In its April shareholder letter, Netflix said it was "pleased with the results" of its crackdown across Canada, New Zealand, Portugal, and Spain. It also noted that after that crackdown, its subscriber base in Canada was "growing faster" than its audience in the U.S. -- where it finally initiated its crackdown in late May.

That move might initially infuriate some of its longtime subscribers, but it could stabilize its long-term growth by boosting its revenues per household. Some of those password sharers might also shift toward its cheaper ad-supported tier.

4. Its stabilizing operating margins

Netflix's investments in new content and currency headwinds have squeezed its operating margins over the past year. However, it also expects its operating margin to expand from 18% in 2022 to 18%-20% in 2023 as its revenue growth stabilizes, the dollar weakens, it cuts costs, and it expands its higher-margin advertising business.

Those healthy operating margins suggest Netflix will remain the only profitable streaming video platform while Disney, WBD, and Paramount continue to rack up steep losses on their competing platforms.

The one reason to sell Netflix: its valuation

Analysts expect Netflix's revenue and adjusted earnings per share to rise 7% and 11%, respectively, this year. But its stock still isn't a screaming bargain at 28 times forward earnings.

It's still being valued as a FAANG stock instead of a traditional media company like Disney and Paramount, and it could be booted to the latter group if its growth in subscribers and revenues cools off again.

Netflix's stock isn't cheap, but its strengths easily outweigh the bearish concerns about its valuation. It won't surge back to its all-time highs anytime soon, but it's still a best-in-breed play on the long-term growth of the streaming media market.