Should You Buy Netflix Stock Right Now?
Key Points
Netflix's valuation has dropped from 50-plus times earnings to just 24 times trailing earnings.
The "overpriced" argument against Netflix has largely evaporated after the recent sell-off.
Its return on assets is more than triple any other large-cap entertainment stock.
Netflix (NASDAQ: NFLX) isn't Wall Street's favorite stock these days. As of June 29, it's down 44% over the last year, trading at a modest 24 times trailing earnings. Are people selling Netflix stock for good reason, or is it a fantastic buy at these low prices?
The efficiency king nobody's talking about
Netflix doesn't just make money; it makes money efficiently.
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- Return on assets? 23.7%, more than triple the next-best entertainment stock, Fox Corp. (NASDAQ: FOX).
- Return on invested capital? 28.8%, again about triple Fox's runner-up reading.
- Return on equity? 48.5%. You guessed it -- roughly three times Fox's returns on shareholder equity. Sure, Warner Music Group (NASDAQ: WMG) runs ahead at 68.5%, but that's not necessarily a good thing. It's the math you get from Warner's low equity and a heavy debt load.
These aren't just profit percentages that look good on a spreadsheet. They're evidence that Netflix squeezes more profit out of every dollar than its sector rivals can dream of.
Image source: Getty Images.
It's still growing at scale
Here's the thing about large companies: They're supposed to slow down over time. Netflix didn't get the memo.
For a company generating over $47 billion in annual revenue, Netflix continues to expand at an impressive clip. Revenue rose 16% year over year in the first quarter, and analysts expect roughly 12% annual growth over the next three years. That's like watching a weight lifter win a cross-country footrace.
The valuation reset
From 2023 to 2025, Netflix largely traded at 50-plus times earnings. Investors gladly paid up, and the stock soared to a record market cap of $569 billion last summer.
Things have changed. Netflix's stock plunged amid the Warner Bros. Discovery (NASDAQ: WBD) bidding drama and Q2 revenue and earnings guidance just below the Street's consensus estimates. I already mentioned the 24x P/E ratio and 44% price drop. Netflix isn't on clearance, but the "overpriced" argument has lost its teeth.
Should you buy?
Netflix combines best-in-class operational efficiency with double-digit revenue growth and a valuation that no longer demands perfection. The stock isn't broken; it's just unfashionable. That's a great setup for long-term investors.
Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.