Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Why Netflix Under $100 Is a Deal

By Rick Munarriz - Sep 26, 2015 at 7:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The leading video service can't seem to decide if it wants to trade in the double or triple digits.

Shares of Netflix (NFLX 1.98%) have shed 20% of their value since peaking early last month. August was bad, and September hasn't delivered a bounce befitting a market darling. 

The stock dipped for four consecutive trading days before bouncing back on Thursday. It's been closing above and below the $100 mark all month long, treating it like a chin-up bar. 

Thursday's pop was enough to get the stock back up over $100, but it has closed in the double digits in nine of the past 14 trading days. Does that make this a buying opportunity? Yes, it does, and let's go over a few of the reasons why that's the case.

1. The valuations get cheaper over time
Bears love to point out how Netflix has a ridiculous earnings multiple, and with its trailing P/E currently north of 230, it's an easy trap to fall into. You don't often see a naysayer point out that the ratio is inflated because Netflix is losing money overseas in the pursuit of heady expansion or that it's merely investing in content today that will benefit its scalable model tomorrow. 

The multiples get kinder as Wall Street pros project farther out. Netflix's P/E drops to 26 if we look out to 2019 and just 13 if we go all the way to 2021. There aren't a lot of large-cap growth stocks out there where Wall Street sees earnings per share exploding 18-fold in six years. Yes, that's a long way out, but keep in mind that Netflix routinely blasts through analysts profit targets. In short, history may prove even those seemingly lofty growth estimates to be too conservative.

2. The market leader deserves a premium
Netflix had 65.5 million streaming customers worldwide at the end of June, 15.5 million more than it was entertaining a year earlier. The model works, and it has proven to be a popular export since 61% of its net additions over the past year were international viewers. 

There are some legit benefits to being the top dog. It's where content creators want to go with their new shows and movies, especially since Netflix offers the autonomy that many of them crave. It gives Netflix more money to spend on programming, since it can divide that into a larger audience than its rivals. Netflix now has more than $10 billion in streaming content obligations. No one is going to approach that, making Netflix's digital vault the top draw. 

3. The ceiling is not set at $8.99 a month
Netflix could charge a lot more than $8.99 a month for its streaming service -- and it will. New subscribers didn't stay away when the cover charge to feast on the digital buffet went from $7.99 to $8.99 a month last year, and we're just scratching the surface. 

Whether Netflix comes through with gradual rate uptick or finds new ways to milk more money out of its captive audience by charging extra for its new virtual reality initiative, offering pay-per-stream on first-run movies, or whatever CEO Reed Hastings ultimately dreams up, it's safe to assume that average revenue per user will move higher in the coming years. You can value Netflix's brand and reputation based on the past, but what it does with that in the future can be something far more special than this summer's hesitant stock price suggests. 

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$195.19 (1.98%) $3.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.