Is it foolish to buy Netflix shares?

Netflix shares have seen a tremendous run up recently, but is the market leader in streaming still an attractive investment? Gordon Best takes a look.

| 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.

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer

Image source: Getty Images

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) is a streaming giant that has revolutionised the way we watch movies and TV shows. But with the share price cooling off after a rally in recent months, are Netflix shares at a potential buying level for my portfolio?

Why would I be interested in Netflix shares?

There are several compelling reasons why investors might still want to consider investing in Netflix, despite the rally we’ve seen.

  • Growing user numbers — User numbers have climbed a further 5.9m in the latest quarter, now at over 230m paid subscribers. This is notable given the crackdown in password sharing and changes in the advertising model.
  • Revenue growth In the last five years, Netflix’s revenue has grown at an average annual rate of 20%. This growth is being driven by the increasing popularity of streaming, as well as Netflix’s expansion into new markets, such as gaming. Future earnings growth is expected at 20%, despite revenues reducing slightly.
  • Market share — Netflix has a dominant market share in the streaming market. The company accounts for over 20% of the global streaming market. It has a strong library of content and is constantly investing in new content. Netflix is also expanding into new regions, such as India and Africa.

What are the risks?

  • Competition — As noted, the company is facing increasing competition from other streaming providers. Disney+, HBO Max, and Amazon Prime Video are all growing rapidly, and they are all gradually taking market share from Netflix.
  • Writer strikes — Recent strikes from writers in the US have put pressure on future releases. Subscribers may be unwilling to continue if there are no new interesting releases.
  • Regulation — Netflix is facing increasing pressure from regulators. Some regulators are concerned about the amount of power that Netflix has, and are considering imposing new regulations on the company.
  • Saturation — Netflix is facing increasing challenges in its core markets. In the US, Netflix is facing saturation, and it is becoming more difficult to attract new subscribers.
  • Debt — Netflix has a $14.5bn debt, which may concern investors. Despite this, interest payments are well covered, and this does not pose any immediate threat to the business.

How are the fundamentals?

  • Price-to-earnings (P/E) ratio — The P/E ratio is a measure of how much investors are willing to pay for each dollar of earnings a company generates. Netflix’s P/E ratio is currently 43.1 times, which is notably higher than the average P/E ratio for the S&P 500. This suggests that investors are paying a premium for Netflix’s growth potential. However, this still remains lower than the sector average of 59.2 times.
  • Discounted cash flow (DCF) — The DCF is a measure of future earnings. The current share price of $413.17 is currently 5% above fair value of $393.52. This suggests the recent sell off may be justified as investors take profits at a price they consider fair.

Am I buying Netflix shares?

Netflix is an interesting investment for those looking for exposure to the growth of the streaming market, despite the variety of risks.

I have owned Netflix shares in the past, and think the operating model is a winner in the long term. However, with the recent rally in shares now bringing the price above fair value, I do not want to buy at this level.

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.

Gordon Best 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.

More on Investing Articles

Mixed-race female couple enjoying themselves on a walk
Investing Articles

A once-in-a-decade chance to get rich buying growth stocks?

We haven't seen a good spell for growth stocks for quite a few years now. But I reckon the signs…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

The FTSE 100 is full of bargains! Here’s 1 stock I’m eyeing up

A weak economic outlook has hurt the FTSE 100. This Fool explains why she likes the look of this consumer…

Read more »

Investing Articles

2 no-brainer beginner FTSE 100 stocks to buy for my portfolio

Getting started with investing can be daunting. Here are two stocks for beginners to consider buying to build their first…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 recession-resistant UK shares investors should consider buying

Our writer details two UK shares she feels could withstand some of the ill-effects of the current malaise to provide…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Glencore share price drops on results. Time to buy?

The Glencore share price wobbled a bit after a weak set of 2023 results. Here's why I have the stock…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Big trouble in China sinks HSBC shares. Should I invest after record FY results?

HSBC shares have slumped following a disappointing end to 2023 for the FTSE stock. Royston Wild explains why this may…

Read more »

View of Tower Bridge in Autumn
Investing Articles

3 dirt cheap FTSE 100 shares to snap up today?

The FTSE 100 is rallying, but many shares still look super cheap on fundamentals. Is our writer buying these three…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

FTSE 100 earnings: what can we expect from Rolls-Royce in 2024?

The Rolls-Royce share price tripled in 2023. Roland Head wonders whether this FTSE 100 stock could continue that impressive trajectory…

Read more »