Netflix Stock: Weakness Suggests Upside Opportunity

I am bullish when it comes to Netflix (NFLX) stock since it has dropped considerably since the start of the year.

There has been a significant dip in most areas of the economy recently.

However, given the current correction in the market, there are innumerable tech companies that offer great upside, one of them being Netflix.

Netflix has revolutionized the way we watch TV shows and movies by offering a wide variety of content that you can watch at any time — there is no need to wait for the next episode or movie to come out.

Netflix has achieved success by focusing on its brand image, and customer experience. The company has accomplished this by using a combination of personalization, and AI technology.

Netflix uses AI to ensure that its users get the best experience possible. For example, Netflix uses machine learning algorithms to predict what type of content you will most likely be interested in watching next.

While in the past, Netflix was the only streaming service that many people used, companies like Walt Disney (DIS), Amazon (AMZN), and Apple (AAPL) have provided a lot of great competition in recent years.

However, Netflix has managed to hold on to its crown so far. Plus, the company’s annual revenue in 2021 is around $30 billion. Netflix is growing like never before and shows no signs of stopping.

Rate Hike

More people are signing up for subscriptions every day, so it’s natural for the companies that provide this service to be raising rates. Netflix is no different.

The standard plan will cost $15.49 a month, while the basic subscription will stay at $9.99. The premium plan will go up by $2 per month to match the increase in consumer demand.

One of the main aspects investors will be looking at is Netflix’s price point. Over the years, Netflix has prided itself on providing quality entertainment at an attractive price. However, Netflix will be spending more on content in the coming years. It’s estimated that it will pay $17 billion in 2022, increasing 57% from what it spent in 2020.

Hence, while it’s still understandable that the company is hiking prices to keep up with consumer demand, the one aspect you cannot ignore is that its content budget is rising with each passing year.

To fund content, Netflix will have to implement some models that increase the cost of its service. The entertainment company can achieve this through occasional price increases or introducing a new password lock for its streaming service.

The streaming giant has not indicated that it is looking into adding an ad tier, which can become a new revenue stream. Therefore, consumers can expect more price increases in the future.

What Options Does Netflix Have?

Netflix has probably seen its best days in the United States and Canada (UCAN) region. That territory is saturated, and you cannot expect more growth from this region.

Latin America and the Asia Pacific are expected to lead growth in the coming years. Europe and MEA will be a bit smaller, but will still likely remain very prevalent in the next few years.

Netflix is continuously looking for places to base its future growth. Since these regions have the largest populations, this decision will affect them. However, the company will have to sacrifice margins in these areas.

In India, Netflix starts at $2.60 for all devices or $2 if you only use mobile. The per capita income in India is $1,947.417 versus $68,309 for the U.S. in 2021.

It remains to be seen how patient the average Netflix investor will stay with this strategy. Investors should ensure that Netflix is still in a good position since it consistently converts revenues into operating income.

By 2021, the company had an unfavorable $159 million in FCF. Netflix has been investing heavily in content and increasing its service. Therefore, it will take time for the company to grow free cash flow sustainably. That is something investors will have to live with.

The positive angle to show this development is that the company with the best content will dominate streaming. So far, Netflix’s ratings are higher than all other streaming apps.

Wall Street’s Take

Netflix’s stock has performed better than many other companies in the last three months. Thirty-five Wall Street analysts have come up with 12-month price targets: 18 are Buys, 15 are Holds, and two are Sells.

The average Netflix price target is $510.89, implying 45.3% upside.

Bottom Line on Netflix

Netflix has revolutionized how we watch TV shows and movies. By providing a wide variety of content from all genres, Netflix has become the go-to place for binge-watching.

Netflix is also one of the most successful companies globally, with almost $30 billion in annual revenue and over 222 million subscribers worldwide. With such success, it’s no surprise that Netflix has been on everyone’s lips as an investment opportunity.

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