Netflix shares are rising again. Should I buy them?

Netflix shares have risen about 40% since mid-July. Edward Sheldon looks at whether he should buy the stock for his portfolio now it’s trending up.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Netflix (NASDAQ:NFLX) shares have made a bit of a comeback recently. They’re still down massively from their highs (over a one-year horizon they’re down about 60%). Yet since mid-July, they’ve risen nearly 40%.

Given that they’re rising again, I’m wondering whether it’s a good time to buy Netflix shares for my portfolio. Let’s take a look.

Should I buy Netflix shares today?

Let’s start by looking at the valuation here. Is there value on offer right now?

At present, Wall Street analysts expect Netflix to generate earnings per share (EPS) of $10.10 for 2022 and $10.80 for 2023. This means that at the current share price of $240, the stock is trading on a forward-looking price-to-earnings (P/E) ratio of 24, falling to 22 using next year’s EPS forecast.

In the past, these ratios would have been considered an absolute steal for Netflix. Not so long ago, this stock had a triple-digit P/E ratio. However, times have changed and the company’s growth has slowed. This year, revenue growth of just 7% is projected. Meanwhile, net profit is expected to decline 11% to $4,536m. Looking at these projections, I wouldn’t say the stock is a bargain at the moment.

Growth plan

Now, Netflix does have a plan to accelerate growth.

Shortly, it’s about to launch an ad-supported tier in an effort to appeal to consumers who don’t want to pay a monthly subscription fee. This is a smart move. Netflix expects this tier to capture about 40m viewers worldwide by Q3 2023, according to the Wall Street Journal.

Wall Street certainly seems to like this plan. Recently, analysts at Oppenheimer upgraded the stock to ‘outperform’ from ‘perform’, stating that the new ad tier should accelerate subscriber growth, drive average revenue per user, and slow churn. They have a price target of $325 here, which implies share price upside of about 35% right now. Meanwhile, analysts at Evercore ISI believe the new plan is not factored into the share price. Their price target is $300, which implies upside of around 25%.

My view is that a lot will come down to execution. If Netflix can execute on this plan and gain a bunch of new subscribers, there’s a good chance its share price will rise. However, there’s no guarantee the plan will work. Consumers have a lot of options these days when it comes to streaming. Right now, Netflix faces competition from the likes of Disney, Amazon Prime, Apple TV, Hayu, YouTube, and more.

Netflix stock: my move now

Putting this all together, I’m happy to leave Netflix shares on my watchlist for now.

If Netflix can execute on its growth plan, today’s share price may turn out to be a bargain. However, I’d like to see some evidence that the plan is working before I buy shares.

Until I see this, I think there are better shares to buy for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon has positions in Amazon and Apple. The Motley Fool UK has recommended Amazon and Apple. 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.

More on Investing Articles

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »