There's no denying artificial intelligence (AI)-related stocks are the market's darlings right now. And understandably so. Their underlying companies are just creating too much positive change for this not to be the case.
The only problem? All the talk about artificial intelligence stocks being in a valuation bubble holds a little too much water. There's good reason to be concerned.
The fact of the matter is, however, most stocks -- even most growth stocks -- aren't artificial intelligence stocks. Plenty of these names are still worth stepping into at their current prices, too. And one of the best prospects among these tickers is streaming giant Netflix (NFLX +0.20%).
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Netflix, up close and personal
Surprised? Maybe even a little confused? It would be a bit surprising if you weren't. Although it's the obvious powerhouse of the streaming industry, the industry itself is running out of prospective subscribers. Netflix is no exception to this reality, something reflected in its recent subpar performance.
NASDAQ: NFLX
Key Data Points
Except, simply adding more paying subscribers isn't the key to this company's growth anymore.
But first things first.
As of the latest tally, $528 billion Netflix is doing about $42 billion worth of business per year, roughly $10 billion of which is being turned into income. That translates into a relatively frothy valuation of around 50 times earnings, but that's not unusual given the company's current growth rates. Last quarter's revenue improved by a little more than 17% year over year, pushing profits up from $5.40 per share to $5.87, for perspective, extending and even accelerating existing trends.
We don't know how many paying customers the company now has, since Netflix stopped disclosing that data as of the beginning of this year. However, as of the end of last year the company boasted 301.6 million members. It's likely added at least a few -- but only a few -- more million subscribers in the meantime; most anyone who wants a particular streaming service already has it.
Underscoring the prospect of slowing growth is last quarter's top line of $11.5 billion, which fell just short of analysts' estimates. Meanwhile, earnings missed consensus estimates of $6.97 per share by a pretty wide margin thanks to soaring content and marketing costs. Rattled investors sent Netflix stock careening on Wednesday in response.
The market's mostly overlooking something about Netflix though, and for that matter, its place within the streaming industry.
A standout with staying power
Yes, in some regards Netflix confirmed current and would-be shareholders' worst fears -- it is getting more expensive to be in this business.
This particular company holds a special place within the streaming industry, however. Not only is it the United States' most-watched subscription-based streaming platform according to Nielsen as well as Pew Research, it arguably invented the streaming industry as we know it. It's doing well enough overseas, too.
It matters simply because it's become the habitual first stop for many consumers. Data from Hub Research indicates that 40% of U.S. television watchers start their viewing search with a streaming service rather than cable, with nearly half of that 40% saying they specifically start this search at Netflix. The next-nearest starting point is a relatively dissimilar YouTube. The third-most popular starting point is Walt Disney's streaming app, although only 5% of consumers actually start there. In a similar vein, for most U.S. households that have access to two or streaming services, it's almost always Netflix and then something else.
Then there's the more subjective argument for owning a stake in Netflix that's the result of its long-lived market leadership. That's the fact that it's become such a well-loved and highly utilized service that it's able to do what rivals arguably can't: trying new things to expand its reach and stickiness.
Case in point: Just last week Netflix announced a deal with Spotify to bring some of the latter's more popular podcasts to Netflix's lineup.
Another example of something Netflix can do differently and better than its competitors is its nascent advertising business. While it's been offering ad-subsidized subscription plans for three years now, the company's still only scratched the surface of the opportunity. As Seaport Research Partners analyst David Joyce wrote earlier this month prior to Tuesday's release of Netflix's Q3 results, "We think advertising could double this year and could grow at 48% annually through 2030 to reach $16 billion." And Wedbush media analyst Alicia Reese agrees, adding, "We expect ad revenue to become Netflix's primary revenue driver beginning in 2026."
Don't overthink what everyone else is
As compelling as this assessment so far might be, it's still not the entirety of the reason to consider committing a few thousand bucks to this stock right now. The rest of the bullish argument for owning a stake in Netflix stock here and now is far more pragmatic. That is, with Wednesday's 10% post-earnings stumble following three months' worth of lethargic performance, this stock is just priced too low to pass up now.
Yes, its third quarter was a disappointment. Keep things in perspective, though. Largely thanks to an advertising business it's still trying to fully figure out, the company still grew its top and bottom lines quite nicely in an economic environment that's not exactly robust.
Both are temporary headwinds, however. Once they're in the rearview mirror, look for this already dominant company to continue leveraging its dominance in a way that inspires investors to ignore its stock's lofty valuation and instead focus on its actual growth potential. Don't overthink it in the meantime.
