Here's a plot twist streaming fans probably never saw coming: Netflix (NFLX 0.04%) shares have plummeted 27% over the past year, a stark contrast to the broader market's rise. The provider of the world's most popular premium streaming service has lost investor confidence.
Thankfully, investing isn't a one-and-done movie. It's a serialized drama. Netflix still has time to come out ahead, and the recovery could start as soon as this summer. Let's take a look at some reasons Netflix could be a winning portfolio move in June.
Image source: Getty Images.
1. The Warner Bros. dance was a net win
Netflix stock buckled late last year after announcing its winning bid for Warner Bros. Discovery (WBD +1.46%). The market felt that Netflix was overpaying for a company trading for less than a third of that price just a year ago. It also seemed unnecessary and a distraction, as well as potentially unlikely to clear antitrust regulatory hurdles.
Investors displeased by the deal found redemption a few months later when Warner Bros. Discovery jumped to a higher rival bidder. This worked out perfectly for Netflix. It got a competitor to pay even more for the parent of HBO, DC Comics, and the namesake movie studio. It also walked away with a $2.8 billion buyout termination fee.
The market was right to knock Netflix when the buyout was initially announced. Why isn't it cheering the lucrative undoing of the deal?
NASDAQ: NFLX
Key Data Points
2. Every quarter is a fresh start
Shares of Netflix also took a hit after posting disappointing financial results in its latest quarterly update. It wasn't a great report. Revenue rose 14% on a foreign-exchange neutral basis, just shy of the 15% increase analysts were targeting. The bottom line was an earnings beat, but that was inflated by the after-tax windfall of the deal termination fee.
The market won't have to wait long to get fresh financials. Netflix is one of the first companies to report its earnings every season. It will deliver its second-quarter results in mid-July.
Netflix didn't raise its guidance in April's first-quarter update, and it paid the price. Following a recent monthly subscription hike, as long as Netflix doesn't experience sharp net defections, it could resume its winning ways with the strong report it has historically delivered.
Its outlook in mid-April called for a 14% increase in revenue and a 15% gain in the bottom line. This isn't a company heading in reverse, even if its stock chart suggests otherwise. Even a decent second quarter can turn the tide, and you might not even have to wait until mid-July to get some encouraging news.
Netflix will host its annual shareholder meeting next week. With the stock sorely lagging the market over the past year, you can bet that it will be under pressure to pull out all the stops to make sure it can offer up some encouraging news at Thursday's gathering.
3. The stock is cheaper now
The stock may have coasted lower over the past year, but revenue and adjusted earnings continue to rise. Looking out to 2027 -- to sidestep the noise behind this year's first-quarter buyout termination fee -- Netflix is trading for 22 times that year's analyst profit target. This may not seem high, but Netflix's P/E ratio is at a three-year low.
Netflix operates a scalable business that continues to get better as it grows. It's a healthy generator of free cash flow. It's been profitable for years, unlike the media giants that took too long to figure that out.
With a compelling valuation and no longer bogged down by fears of having to assimilate a content-rich but operations-poor media rival, Netflix is ready to get rolling again.
