The transition from growth to value will be difficult
Netflix has become a pariah among many investors, including billionaire Bill Ackman. Netflix’s stock price has fallen more than 73% from its all-time high, bringing its market capitalization to around $83 billion. At its peak, Netflix was valued at over $250 billion. So, has NFLX gotten too cheap as it changes its trading strategy?
From growth to value
Netflix has one of the simplest business strategies. The company runs several applications to which people pay a certain access fee. The average price paid per member is less than $14. The company then spends the money buying rights to films and series or creating them. Therefore, estimating business revenue and profitability is relatively straightforward.
For a long time, Netflix was the only game in town. Now, however, the industry has become fiercely competitive, with companies like Paramount, Warner Bros. Media, Apple, Disney, Peacock and Curiosity Stream. These companies offer a platform extremely similar to Netflix, the only difference being the content.
Netflix’s stock price has seen a strong downward trend as investors reassess its stage. In other words, the company has gone from a growth stock to a value player. The company went from being a high growth company to a slowing growth company. As a value stock, Netflix makes sense.
For one thing, if we simply divide the market cap by the number of active users, investors value each customer at just $373. If we assume that an average customer pays $12 per month, that means they pay $144 per month. This results in a multiple of 2.59x, which is a reasonable number. Therefore, in my opinion, I think Netflix is a good value stock and not a good growth company since that growth has dried up.
Another thing to note is that Netflix is moving from a free model to a freemium model. The hope is that it will attract more users who simply don’t want to pay for the service. The risk for this model is that the free option will attract more paying members to adopt the free version.
Netflix Stock Price Prediction
The daily chart shows that the NFLX stock price has been in a strong downtrend over the past few months. First, equities widened sharply to the downside after posting weak results. Now the stock has moved below the 25-day moving average. It has also formed what looks like an island inversion pattern.
The stock price is likely to continue falling in the near term as the bears target the key support at $150. However, in the longer term, stocks will likely rebound as bulls target key resistance at $329.