It's here: Netflix's rally is now set by analysts and Ray Dalio

Key Points

• Ray Dalio, analysts at Morgan Stanley, and the more significant market forces are all lining up behind Netflix as a winner. 
• Recent financial results and future outlooks from management start to justify the valuations that the stock is selling for today. 
• Growth projections and price targets lead to one place; that's up!

Most investors can only dream of matching even 1.0% of a successful investment track record like Ray Dalio's. His hedge fund, Bridgewater Associates, is the largest one in the world, and they have stopped accepting new investor money because the returns alone outpace any sort of inflow they can call for. 

You are not most investors; after all, you are here with MarketBeat, which is why you can begin to match more than that 1.0% dream most people have; all you have to do is stick for a little bit to find out just why Dalio found Netflix NASDAQ: NFLX stock to be an attractive purchase even in today's market.

As of the third quarter of 2023, SEC filings show that Ray Dalio bought up to 95 thousand shares of stock for a total investment of roughly $40.2 million. More than that, you will see why analysts at Morgan Stanley NYSE: MS and other banks have boosted their price target on the stock, implying a coming bull run.

Due diligence 

Now, you would expect all these analysts on Wall Street, including the hundreds of those working for Mr. Dalio himself, to be very thorough when coming up with an investment recommendation in a stock like Netflix, mainly because it belongs to the volatile technology sector.

You see, stocks with a promising performance under the hood will likely attract more investment dollars than competitors that don't run on such high octane. With Netflix, you can just look at the third quarter of 2023 financials and understand why markets have been rewarding this stock.

Starting with the business' lifeblood, free cash flow (calculated as operating cash flow minus capital expenditures), management stated that they now expect around $6.5 billion in free cash flow, up from their previous forecast of $5.0 billion.

With all this new cash, the first order of business was to repurchase $2.3 billion worth of stock in the past quarter. The second order was to increase the buyback program by as much as $10.0 billion, which is roughly 5.0% of the company's market capitalization, by the way!

Such a large buyback budget could imply that insiders themselves believe the stock is not only cheap today but also due for a rally soon. But the buck doesn't stop with Netflix; it looks like the broadcasting and television industry shows a value contagion.

Another investment giant, Warren Buffett, saw a good proposition in buying Sirius XM NASDAQ: SIRI this quarter. Despite what bears may be crying out regarding a potential market downturn, you just can't argue with centuries of combined investing experience.

Extra pointers

Even Ray Dalio can't fight the market, so not counting his billions should make you even more aware of timing and running with the market's sentiment and momentum. So, how is the market feeling regarding Netflix stock?

One thing becomes obvious when you spread the industry to gauge the market's evidence of sentiment. Taken as an average, the industry is trading at an average price-to-earnings ratio of 9.0x, which is now the benchmark to compare stocks like Netflix against.

At a 40.3x P/E, Netflix is commanding a serious 348.0% premium to the industry. Now, before those value investors in the audience begin to look away at this 'expensive' valuation, keep this in mind first. 

Do you think Ray Dalio would purposely overpay 348.0% for a stock that could be replaced by a cheaper competitor like Roku NASDAQ: ROKU if he didn't see what others in the markets were seeing?

There's no way to reasonably get a glimpse of these investors' crystal ball, so unless you know something that the market doesn't, it is in your best interest to trust the reasons behind the rewarding valuations that Netflix is receiving. But don't worry; there is still a reasonable justification behind the price.

Analysts are projecting earnings per share growth of 31.9% for the next twelve months, which is also above the industry's average 24.9% expected growth.

Knowing this, it should be no surprise that Morgan Stanley analysts boosted their price targets to $550.0 a share from $475.0, a 13.0% upside from today's prices.

With this in mind, nobody should go blindly buying a stock just because some investing legend bought it. However, there are a good number of lessons to be taken behind structuring these investments, and how sometimes an 'expensive' stock is really the best thing to go with.