To The Moon

The company's low stock price won't last forever.

As a leading force in building video streaming into what it is today, Netflix (NFLX) and its struggles in the first half of 2022 sent shockwaves through the industry. The company's loss of 200,000 subscribers in the first quarter of 2022, with a projection of 2 million further losses in Q2, had investors scrambling to sell the streaming stock. While Netflix's more modest loss of 1 million members in Q2 2022 eased many investors' worst fears, the stock remains down over 60% year to date.

However, the company's financials suggest Netflix is a safer bet than its stock price would have you think. As a result, prospective investors might be able to buy the streaming stock at a bargain now. Here's why.

A common misconception

Despite investors' caution with Netflix's stock, the company's price-to-earnings (P/E) ratio is down 66% since August 2021 and not far off its lows of the last five years. The company may have been overvalued a year ago, but the valuation looks much more reasonable now.

While subscription numbers seem to have overwhelming power over Netflix's stock price, the metric is becoming less indicative of a company's success, with the average revenue per user (ARPU) being a more reliable figure. For instance, early August marked a momentous feat for Walt Disney (DIS) as it reached 221.1 million streaming subscribers worldwide, overtaking Netflix's 220.7 million for the first time. However, diving into the companies' ARPU shows more subscribers don't equate to more revenue.

For the three months leading up to July 2, Disney+'s ARPU was $6.27 in the U.S. and Canada, while Netflix's was $15.95, suggesting Netflix's streaming revenue in the region was 57% higher. Additionally, the introduction of bundled services and proposed password crackdowns stand only to make decyphering subscriber count murkier. Disney has proven this by counting its users who subscribe to the Disney bundle (Disney+, Hulu, ESPN+) as three separate members, one for each platform. Similarly, when Netflix introduces its announced password crackdowns, which offer consumers the chance to add a household to a subscription for a small fee, the company's ARPU will increase, but that is unlikely to reflect in subscriber figures.

Netflix understands the growing importance of ARPU, with its plans to launch an ad-supported tier and its password-sharing initiative. The company has already taken strides to boost this metric, stating in its Q2 2022 report that its 9% increase in revenue year over year was driven primarily by a 6% increase in its APRU. As the company heads into its next phase of adapting to a vastly different streaming market than existed only a few years ago, this bodes well for the bottom line.

Positive outlook

A recent report from Bloomberg revealed that Netflix is considering charging between $7 to $9 for its upcoming, ad-supported tier and running about four minutes of ads per hour. That's the same frequency as Warner Bros. Discovery's (WBD) ad-supported membership on HBO Max. According to estimates from The Information, if Netflix were to price its ad-supported tier at $9.99 and show four minutes of ads an hour, the company's revenue would increase by 21%.

The figures state that Netflix will likely increase its U.S. subscriber base from 66 million to 76 million, with 30 million members opting for the ad-supported option.The study suggeststhat Netflix can earn roughly $7 a month in ad revenue per customer, generating $2.5  billion and pushing the company's U.S. revenue to $14.4 billion.

Moreover, Netflix projects subscribers will increase from 220.67 million to 221.67 million in Q3 2022, adding a million more members and ending the losses it suffered in the first half of 2022. The subscriber growth could see Netflix take back the 2% market share it lost to HBO Max between Q4 2021 and Q1 2022. If the company's projections are accurate, revenue will grow $4.7% year over year.

More importantly, Wall Street's fixation on subscriber numbers could see the stock skyrocket. Losing only a million subscribers in Q2 2022 versus a projection of 2 million saw the company's stock rise 11% within two days of reporting the news on July 19; there's no telling how high it could fly if Netflix adds a million new members in Q3 2022.

Is now the best time to buy Netflix stock?

Despite marginal gains since July, Netflix's stock is still down 63% year to date and 44% since February. That's thanks to cautious investors who are not yet over the shock of the company losing its first subscribers in a decade. However, the stock's low P/E ratio suggests that it is incredibly undervalued. At its current price, investors have the chance to buy Netflix stock at a bargain, with gains likely to come next quarter as the company's prospects improve.

Source: The Motley Fool

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