Last year was a horrid one for the tech-heavy Nasdaq Composite Index. Its value plunged 33% during the 12-month stretch. But one bad year shouldn’t stop investors from putting money to work in the markets. In fact, there could be some great buying opportunities right now if you’re willing to remain optimistic.
One such business to consider is Netflix (NFLX -1.12%). The top streaming service stock has been up 60% over the past six months. And after posting a strong quarter to end 2022, the narrative might have changed from negative to positive for this innovator.
Here’s why Netflix might be a surefire buy for your portfolio in 2023.
Pressing play on subscriber growth
In the fourth quarter of 2022, which ended on Dec. 31, Netflix reported revenue of $7.9 billion, up 2% year over year. While this is a slowdown from the fast growth that shareholders have become accustomed to seeing, it’s worth pointing out that the top-line figure was adversely impacted by a stronger dollar. Because the business generates 54% of sales outside the U.S. and Canada (UCAN), as overseas revenue was converted back to the dollar, Netflix took a haircut.
Nonetheless, what investors really cheered for was the company’s 7.7 million net new subscribers during the quarter. This significantly exceeded management’s forecast of 4.5 million additions, and it’s probably why shares have been up 16% since the earnings announcement.
Netflix’s cheaper ad-based tier, launched in November, is off to a strong start in that engagement between these customers is similar to the ones on the ad-free plans. What’s more, there is minimal cannibalization, or existing users trading down to the lower-cost option. The leadership team believes the ad tier could represent 10% of overall revenue over time.
After the business lost 1.2 million members in the first six months of 2022, many Netflix bears said the streaming service was done growing. Clearly, this isn’t the case. In fact, all four geographies, even the mature UCAN region, posted solid gains.
Not the Netflix of old
Long-time Netflix shareholders must get comfortable with the company’s next phase. Co-founder Reed Hastings is stepping down from his title of co-CEO to move to Executive Chairman. Former COO Greg Peters will join co-CEO Ted Sarandos to lead the entertainment juggernaut. It’s hard to understate Hastings’ importance in spearheading Netflix’s rise and the secular shift to internet-enabled television.
Investors can also expect the days of Netflix burning through cash to be a thing of the past. The business generated positive free cash flow (FCF) of $1.6 billion in 2022, at the high end of what management forecasted last quarter. And for the current year, Netflix expects to earn $3 billion of FCF. Because cash content outlays this year are projected to remain in the ballpark of $17 billion, any incremental revenue should boost the FCF number.
And with this bolstered financial situation, something naysayers never thought would happen, Netflix plans to continue share repurchases this year, last buying back its stock in 2021. It’ll be interesting to see how management balances trying to achieve growth with returning capital to investors.
Moreover, Netflix currently has $14.4 billion of debt on its balance sheet, all of it fixed rate. The business is in much better shape than some of its streaming rivals. For example, Warner Bros Discovery has a whopping $50.4 billion of debt, while Disney has $45.3 billion.
Looking at the valuation
Besides returning to membership growth and finally getting to sustainable positive FCF, prospective investors should look at the stock’s valuation to become more bullish about the company. Even with the stock rising considerably over the past six months, as of this writing, shares traded hands at a price-to-earnings ratio of 37, which is substantially below Netflix’s trailing three-, five-, and 10-year averages.
And according to Wall Street analyst consensus estimates, Netflix’s earnings per share will increase at a compound annual rate of 19.7% between 2022 and 2027. This means that right now, the stock is trading under 15 times its forecasted 2027 EPS of $24.50. If the multiple contracts to 30, this still translates to a return of 15% over the next five years, good for a double.
The pessimism that surrounded Netflix early last year appears to have switched to optimism. Investors might take the latest quarter’s results as a sign to buy the stock.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.