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The Netflix (NASDAQ:NFLX) share price hit a 52-week low on Wednesday (21 January) after the firm’s latest earnings report. I’ve been watching this one carefully and waiting for a buying opportunity – is this it?
The stock is down 40% from its recent highs, despite the company making more money than ever before. But there are a couple of things that need a closer look before making a decision.
Earnings
Netflix’s revenues were up 17.6% compared to the same quarter in the year before. And – importantly – this was partly the result of a strong performance in its advertising division.
As a result, profit margins widened and earnings per share grew 31%. The stock trades at a price-to-earnings (P/E) ratio of 33, which reflects high expectations, but this is still a strong result.
The firm’s forecast, however, is for revenue growth of between 12% and 14% for 2026, which is lower than what it just achieved. And this is a key reason why the stock has fallen after earnings.
High multiples typically mean investors are expecting sales to keep growing quickly. So the rate of increase slowing can cause the share price to fall as the multiple contracts.
Acquisition
At the moment, one of the key points of uncertainty for potential investors is Netflix’s attempt to buy Warner Brothers Discovery. Things haven’t been going to plan recently.
Back in December, Netflix had a deal to buy the firm’s studio and streaming assets. But this has developed into a bidding war with Paramount Global, which wants to buy the entire company.
As a result, the price has increased significantly. And instead of using its stock as currency in the transaction, Netflix has had to take a loan and pause its share buyback programme to offer cash.
That greatly increases the risk with the acquisition. Warner Brothers Discovery has some top assets in terms of intellectual property, but there is a real danger of paying too much for them.
Opportunity?
Over the last 12 months, my view on Netflix has shifted significantly. I had been concerned that it might struggle to retain subscribers when household budgets come under pressure.
In fact, the opposite has been true. People have responded to cost of living increases by sticking to the streaming service as a relatively cheap source of entertainment compared to going out.
I stayed away from buying the stock, though, because it climbed sharply in April and I thought the price was too high. But it’s now trading roughly in line with its average valuation multiples.
Given this, the stock has made it back onto my list that I’m keeping an eye on. I don’t want to see the company overpay for an acquisition, but I do think it’s worth considering at today’s prices.
A quality company
The last time Netflix fell out of favour with investors was when subscriber growth faltered in 2022. But anyone who bought the stock then is now up 350% on their investment.
Uncertainty over the potential acquisition is weighing on the stock, but I think the business is still very strong. As a result, I’ll be taking a closer look when I’m next in a position to invest.
