Netflix has become a pariah among many investors, including billionaire Bill Ackman. The Netflix stock price has plummeted by over 73% from its all-time high, bringing its market cap to about $83 billion. At its peak, Netflix was valued at over $250 billion. So, has NFLX become too cheap as it changes its business strategy?
From growth to value
Netflix has one of the simplest business strategies. The company runs multiple applications that people pay a certain fee to access. The average price paid per member is less than $14. The company then spends money by either buying rights to movies and series or creating them. As a result, estimating the company’s revenue and profitability is relatively simple.
For a long time, Netflix was the only game in town. Now, however, the industry has gotten extremely competitive, with companies like Paramount, Warner Bros. Media, Apple, Disney, Peacock, and Curiosity Stream being in the industry. These companies offer a platform that is extremely similar to Netflix, the only difference being the content.
The Netflix stock price has been in a strong downward trend as investors reassess its stage. In other words, the firm has moved from a growth stock to a value player. The company has moved from being a strong growth firm to one whose growth is decelerating. As a value stock, Netflix makes sense.
For one, if we just divide the market cap by the active number of users, investors value each customer at just $373. If we assume that an average customer pays $12 per month, it means that they pay $144 per month. This results in a multiple of 2.59x, which is a fair number. Therefore, in my view, I believe that Netflix is a good value stock and not a good growth firm since this growth has dried up.
Another thing to note is that Netflix is transitioning from a free to a freemium model. The hope is that it will attract more users who are simply unwilling to pay for the service. The risk for this model is that the free option will incentivize more paid members to embrace the free version.
Netflix stock price forecast
The daily chart shows that the NFLX stock price has been in a strong bearish trend in the past few months. First, the shares made a strong down gap after it published weak results. Now, the stock has moved below the 25-day moving average. It has also formed what looks like an island reversal pattern.
The stock price will likely continue falling in the near term as bears target the key support at $150. However, in the long-term, the shares will likely rebound as bulls target the key resistance at $329.