Is Netflix the Loosest Link in FAANG?
For big tech investors, Netflix (NFLX) is one of the go-to options in the market today. Indeed, the company’s inclusion in the “FAANG” acronym is telling. Netflix remains one of the growth unicorns that has made many long-term investors extremely rich by simply holding onto shares over the past decade.
Today, the investment thesis with NFLX stock is one that’s a bit more difficult to ascertain. This company is one that’s still growing quickly, and has seen a boost in profitability and revenue growth as a result of the pandemic. However, concerns about how sustainable Netflix’s growth prospects are from here provide questions for long-term investors considering whether to buy this stock at these levels. (See Netflix stock charts on TipRanks)
Let’s dive into why Netflix may be a stock that investors should be cautious about, relative to its FAANG peers.
Uncertainty Around Growth Prospects Bearish for NFLX Stock
Netflix is a hyper-growth stock, in the truest sense of the term. The ability for this streaming platform to continue to reel in millions of new users each and every quarter has been something incredible to watch. During the pandemic, this growth rate was further accelerated, leading to some rather impressive outperformance in NFLX stock.
Indeed, since the depths of the pandemic, shares of NFLX stock have gone from around $290 per share to a 52-week high of $593. That’s a double-up for investors in a little more than a year. Not bad at all.
That said, with theaters reopening, and the stay at home entertainment catalyst likely to dwindle somewhat in the months and quarters to come, there are viable questions around whether Netflix’s recent growth rate can be sustained.
Additionally, added competition in the streaming space from the likes of Disney (DIS) and Amazon (AMZN) have made this sector one that’s a bit more difficult to analyze from a growth perspective. It appears there’s room for multiple players in streaming; however, the extent to which Netflix users stay loyal over the long-term remains to be seen, given the content spend other competitors have put into their platforms of late.
Valuation Concerns Ought to Be Taken Seriously, If Growth Decelerates
In a potential scenario where Netflix’s top and bottom line growth rates decelerate, there’s a lot of downside potential with this stock. Those not 100% confident in the growth rate of this FAANG play may want to seek other opportunities right now.
Indeed, looking at the company’s most recent 2021 analyst projections of around $30 billion per year for Netflix, the company is valued at 7.9-times revenue. This valuation multiple looks even more crazy when one considers price-to-earnings, around 65-times.
Compared to competitors such as ViacomCBS (VIAC) and Disney (DIS), which are perhaps the best comparables to Netflix, this valuation multiple can only be explained by Netflix’s higher growth rate. Indeed, Disney has more than two-times Netflix’s revenue, yet Netflix’s market capitalization is quickly approaching that of Disney. Viacom’s revenues came in pretty close to those of Netflix, yet Netflix garners roughly 8-times the valuation in the market.
As the streaming market continues to mature, many investors expect Netflix to generate a more mature valuation multiple. That said, this company is still being valued as an early-stage growth play, something investors should certainly keep in mind.
What Analysts Are Saying About NFLX Stock
According to TipRanks’ analyst rating consensus, NFLX stock comes in as a Moderate Buy. Out of 36 analyst ratings, there are 26 Buy recommendations, 7 Hold recommendations, and 3 Sell recommendations.
As for price targets, the average Netflix price target is $606.39. Analyst price targets range from a low of $342.00 per share to a high of $720.00 per share.
Bottom Line
Netflix is a growth stock with a valuation that’s pricing in a continuation of historical growth levels, or potentially an acceleration from here. For investors concerned about the sustainability of Netflix’s growth prospects, this is a stock to be wary of at these levels.
Until we see year-over-year growth numbers from 2022 on, following the economic reopening, volatility may be on the horizon for NFLX stock. Accordingly, investors seeking more stable and sustainable growth may be better-served by opting for other high-quality big tech growth plays in the FAANG space.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.