Netflix’s valuation ‘is now looking more attractive’ after stock pullback: Analyst

Edward Jones Senior Equity Analyst Dave Heger joins Yahoo Finance Live to discuss the recent pullback in Netflix stock and the outlook for double-digit growth for the streaming giant.

Video Transcript

JARED BLIKRE: All right, the startling plunge in shares of Netflix rages on. Check out these stats. The stock is down 10% in March alone. It's down 45% so far this year. And shares have crashed 52% from their November 17, 2021 record highs. So what's going on here? Let's bring in Edward Jones senior analyst Dave Heger, who has a buy rating on Netflix. So Dave, despite the stock's performance-- maybe this is a valuation play-- what are you seeing in Netflix right now that you like?

DAVE HEGER: Well, certainly, with the pullback in the shares that have happened year-to-date, for us, the valuation is now looking more attractive than what we saw last year. We picked up coverage in June of last year. At that point, this had trouble making sense of the valuation on Netflix shares.

But now, with the pretty significant pullback that we've seen after the company reported their fourth quarter results, we felt like the shares dropped to a point where considering the fact that the company is still the global leader in streaming services and is investing a great deal in continually bringing out new content, we felt like market was now given an opportunity to be buying the shares.

BRIAN SOZZI: But David, when the stock price falls more than 50% from its highs, clearly, it's sending a different picture about what the next few years might mean for Netflix. What's the market's concern here?

DAVE HEGER: Well, it's certainly the concern is the growth outlook for the shares. When the company provided guidance for the first quarter of 2021, the subscriber growth outlook was below what Wall Street was expecting. And as a result, that caused a pretty significant sell-off in the shares the next day in trading and has continued to weigh on the stock. Certainly, there's been some question of now what is the longer term growth outlook for Netflix, and certainly those expectations have been pulled back quite a bit.

Our take, though, was you still have a company where we still see opportunity for them to continue to grow their worldwide subscriber base, especially in international markets. The company still is less than 30% penetrated into broadband households and markets outside of China. So there's likely still opportunity to further penetrate into those households.

And we've seen the company at times raise prices to account for growing content and the growing value of its service, so we feel like the combination of what we still see future subscriber growth plus future price increases that may come down the line offer the opportunity for still seeing double digit top line growth in opportunity to further grow profitability, as we don't expect operating expenses to grow as quickly as revenue.

JARED BLIKRE: And Dave, I want to direct everybody's attention to the YFi Interactive, where I'm looking at our streaming stock heat map. And a couple of things stick out here. I'm going to sort by performance, so we can see some of the worse off players. FuboTV down 59%, Roku down 55%, Netflix, of course, down 43%. And even some of the bigger players are having some problems here. But I'm just wondering, in terms of M&A, a lot of companies seeing these distressed share prices across a wide variety of industries right now. Do you see any kind of pickups or boltons or anything like that in this space happening in the near future?

DAVE HEGER: Well, certainly, you're looking-- Netflix specifically, the company has been a little more active on the M&A front as of late. In particular, the company appears to be wanting to add content within the gaming space. The company has talked much more about raising its profile in online gaming and that being a new way to add value to Netflix subscribers, and perhaps helping to justify the price increases that have been made over time.

So I think in the near term, that may be an area that we see further activity in terms of Netflix and continuing to grow the type of content that they have available and move beyond some of the traditional programming they've offered and expand a little more broadly into the online gaming space.

BRIAN SOZZI: Dave, I hear what you're saying on some of these things, but do you think that the stock price perhaps might be saying that we may be nearing a recession at some point over the next year because of high gas prices, economic weakness? Because of everything going on in the world, a Netflix subscription by many households may have to be canceled.

DAVE HEGER: Well, and certainly, that's a risk. The broad macroeconomic picture certainly offers some dark clouds for all companies. But one thing, at least historically, that we've seen in the traditional pay-TV world is that subscribers tend to hold on to that form of entertainment in terms of home entertainment because some of the first things that often are cut are things like going out to dinner, going out to movies, that type of expense, where home entertainment seems to hang on longer in terms of people using that as their one means of still having some form of entertainment, even in more difficult times.

So we certainly anticipate that might be the case for next Netflix. We haven't really been through a big recession in terms of Netflix being a major presence in households. Certainly, the recession we had in 2020, if anything, Netflix usage increased. But that recession was driven by the onset of the COVID-19 pandemic. And so people were forced into forms of home entertainment. But certainly, historically, various forms of home entertainment have held up relatively well in difficult environments. And other forms of entertainment outside the home tend to be cut first.

JARED BLIKRE: Well, I'll tell you what, Dave, I'm an old-fashioned Parcheesi and Monopoly guy myself. Dave Heger, thanks for stopping by, Edward Jones senior equity analyst.