Here’s why I’m convinced the Netflix share price has overcorrected

The fall is not adding up!

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Anyone even vaguely interested in stock markets investment news would have picked up on the buzz around Netflix (LSE: NFLX) this week. Unfortunately for the Nasdaq-listed streaming giant, it is all for the wrong reasons. Its recent results led to a single day plunge of 35% in the Netflix share price.

I took a closer look at its latest numbers and based on them and other factors, I think the stock has overcorrected. Here is why. 

Netflix share price falls on drop in net subscriber additions

The biggest reason for the drop is said to be its subscriber additions. It has lost net additions to subscribers this quarter and expects to lose more in the next quarter. I am not sure why that is surprising, though. We are living in a post-lockdown world again, which has widened our entertainment options. The way I see it, Netflix’s competition here is not just from the fast growing array of other digital platforms but a myriad of other activities from cinemas to clubbing that are available again. 

Moreover, the awful combination of high inflation and growth slowdown is likely hurting consumer spending. As per a recent survey, things could get even worse for subscription services in the near future and not just Netflix. This has nothing to do with this particular streaming service, really.

The “woke” issue

I do believe, as a subscriber myself, however, that Netflix’s content focus could be getting in its way. Elon Musk has recently blamed the service’s numbers to the “woke mind virus”. As a woman of colour and an immigrant at that, I have no problem with anything woke, to be sure. And I would certainly not call a woke mind a virus either. But when entertainment begins to feel like incessant agenda pushing, it can be a bit tiresome!

Continued growth in Netflix’s revenues

Despite the loss of subscribers, though, the company’s revenues continue to grow. In the latest quarter they grew by 9.8% on a year-on-year basis. While this is definitely a slowdown, I like the fact that its post-lockdown revenues are still growing. Its net income has fallen, but the trend is not expected to last into the next quarter. This is a positive too, in my view.  

In fact, as a potential investor, I care less about whether it has 2 subscribers or 2 million subscribers. I am more concerned about what it says for its revenues and earnings. And if these continue to look good, it is fine with me. Of course subscriber numbers are important in a growing market, but the digital streaming market has already grown a lot. And Netflix has acquired a corner of the market. 

What I’d do

I am willing to cut it some slack for now and observe where the stock goes in the next few months. Its share price has fallen to below pre-pandemic levels, even though its financials are way ahead. It is also looking at new revenue streams, like advertisements. Analysts are also bullish on the stock, and that is probably to be expected considering that its valuations in terms of price-to-earnings (P/E) and price-to-sales (P/S) are at moderate levels of around 20 times and 3 times. This indicates an overcorrection in stock price to me. If it falls any further, I will probably buy it. 

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.

Manika Premsingh 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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