Nasdaq Bear Market: Is This Streaming Stock a Safe Buy in 2023?

Last year was horrible for technology Nasdaq Composite Index. Its value plummeted 33% during the 12-month stretch. But a bad year shouldn’t stop investors from putting money to work in the markets. In fact, there could be some great buying opportunities right now if you are willing to remain bullish.

One such business to consider is Netflix (NFLX) -1.12%). the top streaming service stock It has increased by 60% in the last six months. And after posting a strong quarter through the end of 2022, the narrative could have turned from negative to positive for this innovator.

Here’s why Netflix could be a safe buy for your wallet in 2023.

Pressing play on subscriber growth

In the fourth quarter of 2022, which ended December 31, Netflix reported revenue of $7.9 billion, up 2% year-over-year. While this is a slowdown from the rapid growth that shareholders have become accustomed to seeing, it is worth noting that the headline figure was negatively affected by a stronger dollar. With the business generating 54% of sales outside of the US and Canada (UCAN), and overseas revenue being converted back to the dollar, Netflix cut its hair short.

However, what investors really applauded was the company 7.7 million net new subscribers during the quarter. This significantly exceeded management’s forecast of 4.5 million additions, and is probably why the stock is up 16% since the earnings announcement.

Netflix’s cheapest ad-based tier, launched in November, is off to a good start in that engagement among these customers is similar to ad-free plans. Also, there is minimal cannibalization, or existing users switch to the lowest cost option. The leadership team believes that the ad tier could account for 10% of total revenue over time.

After the company lost 1.2 million members in the first six months of 2022, many Netflix bears said that streaming service it was made to grow. Clearly this is not the case. In fact, all four geographies, including the mature UCAN region, posted solid gains.

Not the Netflix of old

Longtime Netflix shareholders should be comfortable with the company’s next phase. Co-founder Reed Hastings retires of his co-CEO title to become CEO. Former COO Greg Peters will join co-CEO Ted Sarandos to lead the entertainment giant. It’s hard to underestimate Hastings’ importance in spearheading the rise of Netflix and the secular shift to Internet-enabled television.

Investors can also hope that the days of Netflix spending cash are a thing of the past. The business generated positive free cash flow (FCF) of $1.6 billion in 2022, on the high end of what management forecast last quarter. And for the current year, Netflix expects to earn $3 billion from FCF. With content cash outlays this year projected to remain in the $17 billion range, any incremental revenue should boost the FCF number.

And with this bolstered financial situation, something detractors never thought would happen, Netflix plans to continue share buybacks this year, last buying back its shares in 2021. It will be interesting to see how management balances trying to achieve growth with return of capital to investors. .

Additionally, Netflix currently has $14.4 billion of debt on its balance sheet, all at a fixed rate. The business is in much better shape than some of its streaming rivals. For example, Discovery by Warner Bros. has a huge debt of $50.4 billion, while Disney it has $45.3 billion.

Looking at the valuation

In addition to returning to membership growth and eventually reaching a sustainable positive FCF, potential investors should look at stock valuation to become more bullish on the company. Despite the stock rising sharply in the past six months, at the time of writing, the stock was trading at a price price-benefit ratio of 37, which is substantially below Netflix’s three-, five-, and 10-year averages.

And according to consensus estimates from Wall Street analysts, Netflix’s earnings per share will grow at a compound annual rate of 19.7% between 2022 and 2027. This means that, right now, the stock is trading below 15 times its 2027 forecast EPS of $24.50. If the multiple contracts to 30, this still translates to a 15% return over the next five years, good for a double.

The pessimism that surrounded Netflix early last year seems to have turned to optimism. Investors could take the results of the last quarter as a signal to buy shares.

neil patel He has no position in any of the mentioned stocks. The Motley Fool has ratings and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: Long Calls January 2024 $145 at Walt Disney and Short Calls January 2024 $155 at Walt Disney. The Motley Fool has a disclosure policy.

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