Netflix (NFLX) stock has been feeling the selling pressure of late, as the Nasdaq led the latest downward charge. The smallest FAANG stock is arguably the most expensive, with a trailing price-to-earnings (P/E) multiple of 52.9 times and a price-to-sales (P/S) multiple just shy of 10 times.
Indeed, Netflix's recent growth justifies such a hefty relatively multiple. That said, comparables are due to get tougher. Not just because America is unlikely to lockdown again in the face of the Omicron variant, but because the slate of flicks in the rear-view mirror is so robust that it'll be tough to top.
The record-breaking success of the South Korean hit drama Squid Game will be hard to reproduce in coming quarters. It's hard to keep delivering record-breaker after record-breaker. The unexpected global success of the show was a pleasant surprise for Netflix, fueling excitement in the stock, even in the face of harsher year-over-year comparables against a lockdown-filled 2020.
After the latest 15% pullback, I think a large chunk of the Squid Game hype is already out of the stock. As magnificent as the show was, it's fallen out of the top 10, and other shows and films have stepped up. That being said, with a full pipeline of compelling content on the way, another surprising blockbuster hit shouldn't be ruled out. For now, I am bullish on NFLX stock, even in the face of a market correction.
Netflix Shows Rivals How It's Done
Even with the ascent of rivals in the video-streaming arena, Netflix remains the undisputed king of streaming content. The company delivers not just on the quality front, but heavily on the quantity front as well.
As important as quality is for consumers, not every piece of high-rated content will appeal to every type of consumer. Catering to a wide range of audiences has been key to Netflix's durable competitive advantage, and the reason why it's been able to hold its own amid the rush into video-streaming space for viewers.
Not every Netflix hit has been a big-budget production, either. Squid Game didn't cost that much to make, yet people clearly can't get enough of the franchise. Focusing on telling stories, rather than funneling money into series, as Apple (AAPL) has done with its Apple TV+ streaming service, has worked out very well for Netflix. The firm's focus on getting the best bang per every buck it invests has allowed it to stay head and shoulders above the pack, delivering on quality and quantity while staying within a budget.
With a Squid Game season two likely to land at some point over the next few years, it's going to be hard to unsubscribe from Netflix, even with all the other rival subscriptions moving in. It's yet another powerful franchise to add to its arsenal alongside the likes of Black Mirror, Stranger Things and Narcos.
Now, Netflix has deep pockets and enough money in its budget to blow on expensive productions. But it has played its hand quite well, with a broad range of content, and that's likely thanks to the genius of CEO Reed Hastings and company. The man has risen to the occasion in prior tests, and he will probably continue to do so, with his competitive spirit that's likely ingrained in the company's culture.
In time, though, rivals will catch on and attempt to copy Netflix's strategy to take its crown. Big data algorithms and all the sort can help firms become more Netflix-like, but Netflix knows the competition is breathing down its neck, and it's ready to take the next step while playing simultaneously playing defense.
Wall Street's Take
According to TipRanks’ consensus analyst rating, NFLX stock comes in as a Buy. Out of 31 analyst ratings, there are 24 Buy recommendations, 4 Hold recommendations and 3 Sell recommendations.
As for price targets, the average Netflix price target is $677.76, implying an upside of 15.5%. Analyst price targets range from a low of $342.00 per share to a high of $800.00 per share.
Don't Underestimate Netflix's Lateral Movements
What's the next step for Netflix? Video games. The company's move into gaming is starting with a subtle toe-dip, with a handful of mobile games given free to its subscribers. Given the pace of recent game studio acquisitions, though, Netflix is evolving before our eyes into so much more than a video-streaming firm. Like many other FAANG stocks, Netflix is taking a step back to consider the broader picture, where there's greater growth to be had.
Slam Netflix's gaming push, if you will, but the company has proven its doubters wrong so many times in the past. I think more of the same is to be expected from the firm that has one of the best managers in the tech scene. Unfavorable comparables or not, Netflix will likely be hard to keep down, as it continues giving consumers what they want.
Disclosure: Joey Frenette owned shares of Apple at the time of publication.
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