For the past few months, shares of streaming giant Netflix (NFLX +1.04%) have been in a tailspin, and the stock is getting close to its 52-week low of $82.11. The market doesn't appear overly thrilled with its attempt to acquire Warner Bros. (which is still currently part of Warner Bros. Discovery) in what would be a massive $72 billion deal that would saddle the company with additional debt if it were to go through.
Last summer, Netflix was looking unstoppable, with its stock reaching a high of more than $134. But things have changed sharply since then, and now, at the time of this writing, it's down more than 30% from that peak. Could this be an opportune time to invest in this growth beast?
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The stock's valuation has come down, but it remains high
Netflix's stock currently trades at 37 times its trailing earnings, which is far higher than the S&P 500 average of just under 26. But it's notably below what it has normally traded at over the past five years.
NFLX PE Ratio data by YCharts
The last time the stock traded at a much lower earnings multiple than where it is today was back during the crash in 2022, when growth stocks as a whole declined due to rising inflation. Buying Netflix's stock back then would have been a phenomenal decision, as it has tripled since 2023. Today, it's trading at levels it hasn't been at since April of last year, when the announcement of reciprocal tariffs spooked the market.
Why more of a discount may be warranted
For years, Netflix has been a leading company in streaming, profiting and thriving while others have struggled. Warner Bros. has fallen into the latter category. While there's no doubt the business contains some incredible assets and brands, it struggled to succeed when it was part of AT&T and now as part of Warner Bros. Discovery, which is splitting off into multiple parts.
Adding a business such as Warner Bros., which investors may have questions about, and which will inevitably add some greater risk and uncertainty for Netflix in the short and long term, is likely why there has been far less excitement around the stock of late. It could be a challenging integration to work through, assuming the deal ends up going through, which is by no means a certainty, as Paramount Skydance is still trying to buy all of Warner Bros. Discovery.
Given all the question marks, it could make sense for investors to demand more of a discount for Netflix's stock, and doing so is a prudent move when you're uncertain about an investment as a lower valuation gives you a better margin of safety in the event that things don't go as planned.
NASDAQ: NFLX
Key Data Points
Is now a golden opportunity to buy Netflix stock?
Netflix's growth rate has typically been in double digits, but below 20%. It's done well, but I don't think it's done well enough that a 40 times earnings multiple would be a good value for the business. Throw in the uncertainty of an acquisition for Warner Bros. and the potential for that to chip away at its margins, and even paying 30 times earnings might seem rich for Netflix.
Although the stock is down, I think it's risen too much in recent years to justify buying at its current levels. There could be much more room for Netflix's stock to slide in the future, given its steep valuation, which is why I'd avoid it for the time being; there are many other solid growth stocks to choose from instead.
