Growth stocks typically have many common features. These include a track record of growth, high valuations in relation to current earnings and strong future prospects. Netflix (NASDAQ: NFLX) has always been considered one of the most promising growth stocks in the world. For this reason, as revenues and profits were spurred on by the pandemic, the company reached a valuation of over $300bn. But amid declining subscriber numbers, alongside evidence of far slower growth, Netflix has fallen from grace, and currently has a market capitalisation of $100bn. In 12 months, it has fallen almost 60%. Therefore, can Netflix still be classed as a growth stock, and am I tempted to buy after its recent drop?
The recent results
There were not many positives to take from the recent results. Indeed, after originally estimating that it would add 2.5m subscribers in the first quarter, it turned out that it would have gained only a fifth of that number if not for the Russia-Ukraine situation. In the event, the company lost 200,000 of them due to the lost 700,000 subscribers from Russia. There is evidence that things are about to get worse. In fact, for the second quarter, the streaming giant now expects that it will lose another 2m members. As the cost of living continues to increase, there are worries that consumers will continue to cancel subscriptions for the foreseeable future. This was the primary reason why Netflix stock sank last week, dropping over 30% in the day following the results.
There is also further worrying news. For example, after buying Netflix stock in January, William Ackman sold 3.1m shares, making a loss of more than $400m. This came just weeks after the billionaire investor and CEO of Pershing Square Capital praised Netflix. This is a sign that Wall Street no longer views it as a growth stock, and some big players not want it in their portfolios.
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What are the positives for Netflix stock?
There were some positives for the stock in the recent trading update. Revenues were still able to rise year-on-year, albeit only by 10%.
Further, Netflix does seem to have a plan to turn around its fortunes. This includes cracking down on the number of households sharing accounts, which is one reason why Netflix is struggling to add more accounts. There is also a plan to add a lower-price subscription model with ads. This has worked for Hulu, and therefore, may aid Netflix in returning to growth.
Finally, it has a price-to-earnings ratio of under 20 which, for a growth stock, is extremely low. However, due to worries over whether Netflix can be classed as a growth stock, I’m taking this valuation with a pinch of salt.
So is Netflix still a growth stock?
Overall, I really don’t feel that Netflix is a growth stock anymore, as its starting to lose subscriber numbers, and declining revenues may start to follow. Further, as inflationary pressures continue to increase, alongside the large amount of competition in the streaming space, I feel that more subscribers will leave. Therefore, I won’t be buying Netflix stock unless it enters significant value territory or until there are signs that it’s returning to growth.
