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Netflix stock jumps 15% in two days. Is it a buy?

Posted: 2 February 2022 10:00 am
News
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After a steep drop in January, votes of confidence from analysts, its own CEO and famed investor Bill Ackman are pushing the stock up. Here's why Netflix may still be a buy today.

Beaten down at the end of January, Netflix (NFLX) is again one of the market's hottest stocks, up more than 15% in two days.

But the on-demand video giant is still down 25% so far this year, and at about US$444 at the time of this writing, 36% below the all-time high at US$700.99 set in November. That suggests it has room to run.

Votes of confidence from analysts, its own CEO and hedge fund whiz Bill Ackman helped drive this move up. Here's why Netflix may still be a buy today.

Why the stock went down

The latest low came after the company said in a January 20 earnings call that subscription growth was slowing after a price hike and with increased competition from other streaming services.

The market had also pushed tech shares in general down in 2022. And with COVID concerns easing, many so-called stay-at-home stocks, including Zoom Video Communications (ZM) and Peloton Interactive (PTON), have also struggled.

While Netflix remains the leader with more than 220 million subscribers, an increasing number of competitors threatens to eat into its base and cut into potential content.

The stock dropped to a low of US$351.36, the lowest point since the early days of COVID when it started surging with other stay-at-home names.

Why it bounced

The stock got several votes of confidence near those lows.

  • CEO Reed Hastings bought US$20M in shares late last week, according to SEC filings. That's generally a good sign for a stock.
  • Bill Ackman announced on Twitter his Pershing Square Capital Management had bought more than 3.1 million more shares to become one of the company's top 20 shareholders, citing Netflix's strong subscription base and quality content.
  • Analysts at Citigroup and Edward Jones raised their view of the stock from hold to buy.

So what's next?

The question now is how much further Netflix stock will run. Citi's recent buy recommendation gave it a one-year price target of US$450, close to the consensus analyst estimates and not far from where it now trades.

There are certainly enough concerns about competition and subscriber base to think the stock could take a while to regain that peak US$700 price.

Ackman's letter, however, positions Netflix as a longer-term buy given its leadership and strong management history, citing "Netflix's remarkable pivot from DVD rental by mail, to video streaming, to becoming one of the greatest producers of beloved content ever."

Netflix stock was one of the big growth stories of the past decade, opening 2010 at about US$7 and opening 2020 at over US$300. The current pullback has returned it to the pre-COVID levels, but it has been a great long-term buy. Ackman, for one, is betting that the growth story will keep going.

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