The Dip In Netflix Stock Was An Expected Opportunity

Netflix (NASDAQ:NFLX) stock lost around 10% following its first quarter earnings report, leaving investors who bought in before earnings puzzled as the headline numbers were quite strong. However, this drop presents a predictable opportunity. 

The tech-heavy NASDAQ index has been undergoing a correction for several weeks, driven by analysts repricing “expensive” tech stocks. This trend is especially pronounced among companies that are unprofitable and reliant on debt for their operations. Yet, as demonstrated by Netflix, even fundamentally strong and profitable companies are not immune to these market adjustments. 

A Sell The News Setup 

Despite the market’s negative reaction, Netflix’s earnings report was far from disappointing. The company beat expectations in both revenue and earnings, with a significant 17% earnings per share beat. Year-over-year, the results are even more impressive: the $5.28 EPS marked an 83% increase from the $2.88 reported in the same quarter of 2023. 

However, the principle of “buy the rumor, sell the news” seemed to play out with NFLX stock. After climbing 88% over the last 12 months and 25% in 2024 alone, investors were set to lock in profits at the slightest sign of any form of concern.  

They found reasons in the company’s latest update. Netflix’s guidance for the current quarter was tepid, anticipating a dip in subscriptions due to “seasonality.” This forecast contributed to the downturn, especially when coupled with another development that puzzled investors and added pressure to the stock. 

Subscriptions Are No Longer The Key 

Starting in fiscal year 2025, Netflix will no longer disclose to investors updated subscription and average revenue per user metrics, continuing its 2023 decision to stop issuing forward looking subscription guidance. 

Netflix’s management team argues that subscriber growth no longer represents the company’s financial health. CEO Greg Peters emphasized a shift in focus towards “key metrics that matter most to the business,” highlighting the diverse subscription plans now offered, each with unique benefits and risks. Notably, ad revenue will become a more relevant metric for investors moving forward. 

However, this decision was met with skepticism from many investors and even several analysts, who are reluctant to be prescribed which metrics should be deemed most significant. This is concerning as the company simultaneously cites potential subscription decreases as a reason for expected weaker performance in upcoming quarters. Critics argue that if subscription numbers were projected to be positive, Netflix would likely continue to report them. 

The Bullish Case For NFLX Stock Still Holds 

Both perspectives hold merit, and ultimately, Netflix’s performance will decide how investors view the stock. The company’s success hinges on its ability to continually deliver content that resonates with its audience. Netflix has recognized this and is dedicating resources to produce more targeted content that viewers demand. 

This commitment to content creation and spend growth is a significant investment but one that Netflix is managing to sustain below its revenue levels. Fortunately, this was a challenge during its early years, but strong growth over many years implies it is a risk it has overcome. 

Moreover, Netflix is branching into live sports, signaling a strategic expansion beyond traditional media offerings. Although live sports may not become a major revenue stream within the next year, Netflix is clear about its intentions to make a significant impact in this arena, broadening its market appeal. 

Analysts Are Mostly Bullish 

Analysts have quickly responded to Netflix’s earnings report, predominantly maintaining bullish stances. The majority are reaffirming their ‘Buy’ ratings, and the consensus on the price target is trending upwards, reflecting a positive outlook. 

In the short term, NFLX stock’s volatility may cntinue due to the current bearish market sentiment. However, with analysts indicating a potential 15% upside from current levels, investors who have been hesitant might find this a compelling entry point, with the possibility of even more attractive valuations if the market dips further.