Market Sell Off: Is It Time to Buy a Discount on This Phenomenal Stock in Flow?

Investors have been hit by some turmoil in recent days. Weak US economic data, an interest rate hike in Japan and Berkshire Hathawayhis aggressive selling has led to notable declines in the past week for S&P 500 and the Nasdaq Composite index.

However, savvy investors understand that volatility is normal when it comes to achieving solid long-term returns. In fact, the sale could present lucrative opportunities in otherwise fantastic companies, such as this streaming pioneer whose shares are down 10% from their 2024 peak (as of Aug. 6).

Should investors buy the dip in this phenomenal stock?

Dominating the new media landscape

Investors looking to gain exposure to Netflix (NFLX 0.57%)the main pure-play streaming business, may want to take advantage of market pessimism. There are several reasons to like this company.

Let’s start with Netflix’s first-mover advantage. Having a head start in the streaming race has helped to attract customers at a rapid pace with a huge increase in revenue. Netflix won subscribers in a spectacular way because it offered a superior user experience compared to traditional cable television.

Of course, the streaming industry is much more competitive now. But Netflix reigns supreme. As of June 30, it had 278 million members in over 190 countries. It has become a global media and entertainment powerhouse with benefits of scale.

Of course, growth will slow, even if management estimates that the total addressable market opportunity (who are not currently Netflix customers) to be in 500 million smart TV households worldwide. In its most mature markets, the US and Canada, Netflix has historically been able to flex its pricing power.

Netflix’s size means it makes a lot of revenue, to the tune of $36 billion in the last 12 months. This allows it to spend significant sums on content production and licensing, while seeing growing profitability. The company expects to report an operating margin of 26% this year. That would be better than last year’s 21% and 2022’s 18%. Netflix is ​​clearly showing the benefits of its scalable business model at a time when rivals struggle with bottom line performance.

Because Netflix spent so much money in the 2010s to acquire subscribers and develop its content offerings, critics never thought the business would generate positive free cash flow (FCF). Netflix proved the doubters wrong. The company brings in billions of dollars in FCF and uses some of it to buy back shares.

Don’t ignore the rating

It’s rare for investors to see shares of such a dominant enterprise put up for sale. In May 2022, Netflix shares sold for a price-earnings ratio Ratio (P/E) of 15, which is unheard of. In addition to general market weakness amid rising interest rates, investors were concerned about Netflix’s subscriber losses in Q1 2022. But in hindsight, this turned out to be a great buying opportunity.

Netflix stock is nowhere near that cheap today. It trades for a P/E ratio of 39. On the surface, this doesn’t look compelling. Represents a 25% premium for Nasdaq-100 index. However, it is much cheaper than the stock’s five- or 10-year average valuation multiples.

It’s also worth pointing out that over the past five years, Netflix’s earnings per share (EPS) have grown at a compound annual rate of 52%. According to Wall Street consensus analyst estimates, EPS is expected to grow at an annualized rate of 32% between 2023 and 2026.

With the stock down 10% from its 2024 peak, it seems like a good time to take advantage of the dip and add Netflix to your portfolio.