After Netflix stock crashes $300 in 2 months, should I buy below $400?

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After the bull market of 2020-21, the top for tech stocks may already have been and gone. The S&P 500 just had its worst week in a year, losing 8.7% since its 4 January peak. Meanwhile, the Nasdaq has dived 15.1% since its record high on 22 November. Thus, it’s been a bad start to 2022 for US stocks in general and tech stocks in particular. But a few stocks have taken a truly savage beating since October. One of these ‘post-Halloween horrors’ has been Netflix (NASDAQ: NFLX) stock, which has plunged spectacularly since November.

NFLX exploded from 2012-2021

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Go-go growth stock Netflix has generated outstanding gains over a decade. Ten years ago, shares in the video-streaming provider closed at $14.32 on 20 January 2012. Five years later, NFLX had surged to close at $138.60 on 20 January 2017. That’s a mammoth gain of 867.9% in 60 months. Yet Netflix stock kept soaring, hitting an all-time high of $700.99 on 17 November 2021. That’s almost 50 times the closing price on 20 January 2012, under 10 years earlier. Indeed, had I bought $1,000 of Netflix shares at $14.32 on 20 January 2012 and sold at 2021’s peak, I’d have over $48,950. Wow.

Netflix stock gets a nasty knock

However, Netflix stock has been knocked back since November. This followed news that the Federal Reserve — the US central bank — will tighten monetary policy more rapidly than previously indicated. The Fed also expects to raise interest rates three or four times in 2022. With liquidity set to fall and interest rates set to rise, this spooked tech investors. Hence, a wave of selling in the past three months has driven down tech stocks. At the end of 2021, Netflix closed at $602.44, down almost $100 from its November peak.

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On Thursday evening, Netflix unveiled its fourth-quarter earnings report. This revealed slowing subscriber growth. The group added 8.3m net subscribers in Q4, versus a forecast 8.5m. What’s more, Netflix expects to recruit only 2.5m paid net subscribers in Q1 2022 — well short of the 4m recruited in Q1 2021. As a highly rated growth stock, Netflix has to keep its engine running hot. And signs of slowing down has smashed its shares before. Hence, on Friday, the stock closed at $397.50 — crashing $110.75 (-21.8%) overnight. Ouch.

Would I buy NFLX today?

From its all-time high of $700.99 to Friday’s close of $397.50, Netflix stock has lost $303.49. That’s a collapse of almost half (-43.3%) in just over two months — a punishing blow for Netflix shareholders. But having dived so hard, surely the stock will bounce back, right? Not necessarily.

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Netflix pivoted to become a streaming service in January 2007. Over two decades, it has gone from a scrappy start-up (listed on 23 May 2002) to a massive global business. At the current stock price, Netflix is valued at over $176bn. Today, it’s a tech Titan, but for it to remain so, Netflix has to keep growing subscribers, revenues, profits, earnings and cash flow. But woe betide the streaming giant if growth stagnates or turns negative. Because if Netflix goes ex-growth, so too may its shares. And all the while, deep-pocketed competitors are investing heavily to steal its lunch.

Right now, Netflix stock trades on 35.8 times earnings, while offering an earnings yield of 2.8% and no dividend. As an old-school value investor, these fundamentals aren’t attractive to me. I can see this stock’s attractions to risk-taking growth/tech investors but I don’t own NFLX today and I wouldn’t buy, even at Friday’s deeply discounted price.

The post After Netflix stock crashes $300 in 2 months, should I buy below $400? appeared first on The Motley Fool UK.

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    Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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