The FAANG group, comprising Meta Platforms (formerly Facebook) (NASDAQ:META), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet (formerly Google) (NASDAQ:GOOGL), has been riding a wave of success in 2023, largely propelled by the momentum of artificial intelligence (AI). However, one member of this elite group, Netflix stock, has experienced a recent setback, prompting some investors to ponder if now might be the time to buy the dip.
Here’s how the FAANG stocks have fared thus far in 2023:
Meta Platforms has surged by an impressive 153%.
Amazon has seen a substantial gain of 63%.
Alphabet has notched up a commendable 53% increase.
Apple has advanced by a respectable 37%.
Netflix, while still positive, has lagged behind with a gain of 33%.
Interestingly, despite the overall strength of the FAANG group, not all members have outperformed the broader market. In this context, Netflix, the relative laggard, has experienced a decline of over 17% from its mid-July closing high of $477.59, setting the stage for a potential buying opportunity.
Netflix’s Competitive Stance and Growth Strategies
Netflix, boasting a market capitalization of $175.57 billion, holds the title of the largest global streaming platform. Despite its massive size, Netflix managed to increase its sales from approximately $20 billion in 2019 to an impressive $31.6 billion in 2022. Nevertheless, the company has faced challenges in sustaining its top-line growth over the past 18 months, primarily due to heightened competition.
With 238.3 million subscribers, Netflix finds itself grappling with saturation in some markets. Consequently, sales growth for the streaming giant slowed to just 3% year-over-year in the June quarter, amounting to $3.6 billion.
To counteract the impact of a sluggish macroeconomic environment and reduced consumer spending, Netflix has strategically focused on cost reduction and expanding customer options. This approach has been instrumental in driving its stock price higher in 2023. For example, Netflix introduced an ad-supported subscription tier priced at just $6.99 per month, significantly lower than its Premium Plan, which costs $19.99 per month.
During a recent Bank of America conference, Netflix reiterated its commitment to scaling the reach of its new service tier and increasing ad spending on the platform, which could temporarily dent profit margins, leading to a decrease in share prices. Nevertheless, the ad-supported tier holds long-term potential and opens up an additional revenue stream for the streaming behemoth. Netflix has indicated that, accounting for ad revenue, the tier generates $15.49 per month per user, comparable to its standard tier.
Furthermore, Netflix’s crackdown on password sharing contributed to a substantial increase in subscribers, with 5.9 million additions in Q2, surpassing forecasts of 1.7 million. This subscriber growth represented an 8% increase compared to the same period the previous year, marking the company’s fastest growth since Q4 2021.
Analysts’ Positive Outlook for Netflix Stock
Despite concerns stemming from ongoing strikes in Hollywood, which have disrupted content production schedules for Netflix and its peers, analysts anticipate an acceleration in revenue growth during the second half of 2023. On average, sales are projected to increase by 6.7% to $33.7 billion in 2023 and by 13.5% to $38.3 billion in 2024.
Simultaneously, adjusted earnings are forecasted to rise from $9.95 per share in 2022 to $11.88 per share in 2023 and $15.43 by 2024. While Netflix is priced at 4.5 times its 2024 sales and trades at a forward earnings multiple of 25x, it is expected to deliver faster growth compared to the S&P 500 Index.
Netflix has consistently exceeded analysts’ earnings expectations over the past year while providing improved forecasts, leading to analyst upgrades. Out of 35 analysts covering Netflix stock, 20 have a “strong buy” recommendation, 13 recommend “hold,” and two suggest “strong sell.” With analysts’ average price target of $439.97, Wall Street foresees approximately 12% upside in the next 12 months.
Netflix continues to invest substantial sums in region-specific content, enabling its expansion in emerging markets, such as India. The global trend of cord-cutting remains a significant tailwind for Netflix, offering ample room for sales growth and consistent cash flow improvement.
Considering its current valuation, Netflix, as a FAANG stock, appears to be an attractive growth opportunity worth exploring amid the recent dip in its share price.
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