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There Are 30 Billion Reasons Not to Give Up on Netflix Stock

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Netflix (NASDAQ:NFLX) grabbed one award it probably wasn’t aiming for: NFLX stock was officially the single worst performing stock in the S&P 500 Index in the first half of 2022. This came as the company’s subscriber base stopped growing recently, and investors have extrapolated that to mean that the company is heading for terminal decline.

To be fair, we can’t rule out the possibility that Netflix has peaked. However, as I’ll argue, rumors of Netflix’s demise are greatly overblown. The company still has a lot of merit for investors, and at its current share price, the valuation is far more compelling as well.

Ticker

Company

Recent Price

NFLX

Netflix

$180.78

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Netflix Is Already Wildly Successful

From the tone of some of the recent coverage around the company, you’d think Netflix was in a death spiral. Yet it’s one of the healthiest media businesses on the planet.

In fact, over the past 12 months, Netflix brought in $30.4 billion of revenues. Even better, virtually all of that came from subscribers. Subscriber revenue is the king of the new media landscape, as it proves that viewers are willing to pay for your content. For television and film companies, subscriber revenue is much more reliable and durable than that from advertising or licensing sources.

Even if Netflix never manages to grow its subscriber count again, which is highly unlikely, this is already a $30 billion a year business. That is far beyond what is necessary to make Netflix a strong and highly profitable company. People talk about Netflix’s subscriber stall as if it teeters Netflix on the brink of disaster. But $30 billion of annual subscriber revenues is far more than enough to ensure that Netflix can stay in a dominant position in the television industry going forward.

Netflix Has Levers to Pull

Most legacy media companies have the problem of not having sufficient scale on streaming. There’s a host of also-ran streaming services that are struggling to get a meaningful number of subscribers.

Netflix, by contrast, already has the brand and user base taken care of. Yes, it has problems. It needs to do a much better job of licensing quality content over just churning out endless amounts of filler. Areas like password-sharing could be much more tightly controlled. And the company may be able to earn money from advertising, though there is a fine line to balance there in terms of not damaging the core product.

Regardless, the underlying business is healthy. If Netflix gets its costs down to, say, $23 billion per year — which would still give it a gargantuan budget for making new content — it would be earning $7 billion a year in profits and a roughly 25% net income margin. Those are enviable numbers for a media company and would support a much higher share price than where Netflix trades today.

Again, that’s assuming no additional growth from here at all. Simply cutting some excessive spending and realizing some operational efficiencies can turn Netflix into a cash flow machine.

NFLX Stock’s Bottom Line

For two decades now, Netflix has pursued growth above all other aims. And that has worked out quite well. Netflix emerged from a tiny DVD rental firm to one of the leading content producers in America. Additionally, until a year ago, NFLX stock was one of the best-performing growth names out there.

However, in every company’s life, it has to pivot. Netflix is at the point now where it can’t grow at an explosive rate forever anymore. Now it needs to curtail costs and make the most of its existing content and resources. Given Netflix’s past successes, there’s every reason to give the company the benefit of the doubt until proven otherwise.

Sure, things could go wrong for the company even now. But with shares off nearly 70% year-to-date, that risk is fully priced into NFLX stock and then some. The market capitalization of $80 billion is simply unreasonably low for a company with $30 billion a year of high-quality recurring revenues. When growth stocks recover, Netflix will be one of the firms leading the rally.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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