Netflix Bulls vs. Bears: Who Wins This Pullback?

Key Points

• Last month’s strong Q2 beats and solid guidance haven’t stopped the sharp pullback.
• However, analyst support remains overwhelmingly bullish. 
• Despite some valuation concerns, this is lining up to be a solid entry opportunity. 

Shares of streaming giant Netflix Inc NASDAQ: NFLX closed Wednesday just below the $1,180 mark, leaving the stock roughly 15% off its early-July peak. That stumble starkly contrasts with the S&P 500’s nearly 3% gain over the same stretch. The divergence is striking, puzzling, and potentially worrying - all at the same time. It will also be a bitter pill for investors enjoying one of the cleanest multi-year rallies among the big tech names. 

Still, there are reasons to think we’re looking at a golden entry opportunity. Let’s look at two of the top reasons to be brave and one that says to still be wary. 

Reason #1 to Be Brave: Fundamental Strength

Starting with the fundamentals, last month’s report smashed expectations. Revenue was up nearly 16% yearly, and earnings per share surpassed the consensus. 

Going further, Netflix’s management shared fresh revenue and EPS guidance that also came in hot - a move that Wall Street usually loves to see. 

Behind those headline beats were a couple of standout drivers.

For example, Netflix’s fledgling advertising segment is scaling faster than many expected, and already appears robust even if it’s still small in the grand scheme of things.

The company’s growth across regions was fairly broad, and its dabbling into live streaming appears to be paying off already. These all helped to send the company’s operating margin to a record high of 34%, helped along by solid content cost leverage.

It remains one of the world’s most recognizable brands, has proven capable of innovating and pivoting successfully, and is adding subscribers at a considerable clip. For investors who’ve been watching the stock rally for a while and were too cautious to chase an entry, this 15% haircut could be the perfect entry point. 

Reason #2 to Be Brave: Overwhelming Analyst Support

Backing up the theory that we could be looking at a golden opportunity is the fact that analyst sentiment remains overwhelmingly bullish. As Bank of America said after the report, “Netflix remains among the best-positioned companies in media and entertainment with sustainable growth drivers that should prove predictable and defensive amid a wide range of macroeconomic scenarios”. 

And they’re not the only ones. Multiple analysts reiterated positive views after the print, many nudging targets higher to reflect stronger optimism and belief in Netflix’s potential.

Robert Baird, for example, reiterated its Outperform rating while upping its price target to $1,500, matching the update from both Needham and Jefferies. Meanwhile, the team at Wells Fargo moved their price target on Netflix up to $1,560—close to a street high. 

From where the stock closed on Wednesday, that’s not only pointing to a targeted upside of more than 30%, but suggesting Netflix shares could be back cruising through all-time highs very soon. 

1 Reason to Be Wary: Valuation Concerns 

However, it has to be noted that not everyone is convinced that this is a no-brainer. Amidst the gushing analyst support following last month’s report, there was at least one team that raised a big, bright red flag. 

Phillip Securities downgraded its rating to Strong Sell, arguing that the report wasn’t good enough to justify the rally, and that valuation was becoming a genuine concern. With a pre-earnings report price-to-earnings (P/E) ratio of almost 60, compared to the 40 it was around 12 months previously, it’s hard to argue with them. 

Phillip Securities analyst Helena Wang remains cautious on the company’s long-term growth potential, but feels there’s a much bigger correction needed to get the stock back to a healthy level from which to build again. Her $950 price target is a testament to this, which, even with the 15% drop over the past few weeks, suggests Netflix could easily fall another 20% or so.

Wednesday’s 2.7% rise in the stock shows there’s still strong demand, with buyers already stepping in. It looks like an early rejection of the bears’ attempt to push the stock below Tuesday’s low. If Netflix can hold above the $1,150 level through week’s end, expect bearish momentum to fade fast.