Key Points
Netflix (NASDAQ: NFLX) made news recently when a report in The Wall Street Journal indicated that Netflix was considering adding live TV channels to increase engagement.
The report cited concerns among executives about some of the engagement metrics, such as time spent watching and the frequency of finishing seasons or watching multiple seasons. This came from a recent annual business meeting, according to the article.
It caused more woes for Netflix stock, which is down 22% year to date and 41% over the past month. So what’s an investor to do now?
The 1 reason to buy Netflix
Another concern is Netflixʻs second-quarter outlook. The company generated $12.2 billion in revenue in Q1, up 16.2 year over year. Earnings skyrocketed 86% to $1.23 per share, boosted by the $2.8 billion termination fee for when Warner Bros. Discovery (NASDAQ: WBD) abandoned its deal with Netflix.
However, the Q2 outlook called for just $12.57 billion in revenue, a 13.5% gain. Netflix reports its second-quarter earnings on July 16 — right around the corner. Hereʻs why Netflix stock might be a buy heading into Q2 earnings: its valuation.
Netflix is undergoing a transition after the failed attempt to buy Warner Bros., but it is still the most-watched streaming service and has the lowest churn rate. It is now looking to make new moves, and it has an abundance of free cash flow to do so. Netflix had $5 billion in free cash flow in Q1 and anticipates having $12.5 billion at the end of 2026.
The stock is just too cheap to ignore right now, trading at 24 times earnings and 23 times forward earnings. It hasnʻt been this cheap since the middle of the 2022 bear market. Since then, Netflix stock has returned about 265%.
Some 73% of Wall Street analysts rate Netflix as a buy with a median price target of $115 per share, which would suggest 56% upside. It is primed for a run, particularly with a decent Q2 report.
Should you buy stock in Netflix right now?
Before you buy stock in Netflix, consider this:
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
