Netflix: The Rally Is Likely Still Far From Over
I believe it should be clear why investors must develop independent thinking and not get caught up with excess optimism and pessimism. In extreme scenarios, the market could take investors for a ride, taking them by surprise by forming the ultimate turning point when most thought it was going to continue in the same direction.
Netflix is breathing new life into its market leadership, just as its peers rein in spending to focus on profitability. Moreover, Netflix is already ahead of its peers as it's free cash flow or FCF profitable in its SVOD business. It can still afford to spend $17B on content while leveraging its new ad-supported strategy to drive revenue and subscriber growth.
Therefore, the strength of Netflix's dual-pronged strategy has lifted its ability to gain more share against its legacy peers as they face a secular decline in their TV business.
NFLX price chart (weekly) (TradingView)
NFLX has regained its long-term uptrend as of June 2023, a remarkable turnaround from the battering that sent it down to its May 2022 lows, a nearly five-year low back then.
However, that also set up an astute bear trap or false downside breakdown, allowing dip buyers to return with confidence. With NFLX regaining its long-term uptrend bias, I assessed that momentum investors could follow through next, which is pivotal to helping NFLX potentially re-test its all-time highs set in late 2021.
The question is whether NFLX's valuation is still reasonable for investors to take a position here? NFLX's forward EBITDA multiple is no longer cheap at 26.5x. However, due to its scale, the company is likely still in the earlier stages of gaining operating leverage.
Moreover, given the uncertainties over its ad-supported strategy, I assessed that its FY25 EBITDA multiple of 18.5x doesn't seem to have been priced in its ad-supported opportunities fully at the current levels. Therefore, investors are likely still assessing its potential, discounting its execution risks.
As such, while NFLX is no longer cheap, its price action and valuation remain favorable for investors to add exposure, anticipating momentum investors to join in subsequently.To continue with the high growth revenue Netflix has implemented the password crackdown and launched the ad tier. With the ad tier revenue and additional subs signing up, the revenue growth will be very strong. Should have 3.5B free cash flow this year. Netflix is the ONLY profitable streamer out there, and winning the streaming war. $Netflix(NFLX)$
Rating: Maintain Buy.
Resource:Thinking Alpha
Comments