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Netflix (NFLX) Stock Down 25% From Its High Despite Surge: Time to Buy?

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Shares of Netflix (NFLX - Free Report) rest roughly 25% below their highs despite the streaming giant’s massive post-Christmas Eve rally. Netflix performed well at the Golden Globes and recent announcements from Hulu and Roku (ROKU - Free Report) help highlight the streaming industry’s overall strength. So, should investors buy Netflix stock on the dip before it’s too late?

Recent News

Netflix saw its stock price surge Friday after Goldman Sachs (GS - Free Report) analyst Heath Terry reiterated his buy rating and $400 price target for Netflix stock. “We believe the fourth quarter will only be the beginning of the payoff from Netflix's accelerating spend and increasingly robust Originals slate, and that consensus continues to significantly underestimate the financial impacts of these dynamics,” Terry wrote in a note.

Netflix then went on to take home more Golden Globes Sunday night, five, than any another other network or streaming service. This came after the firm ended HBO’s (T - Free Report) 17-year run on the top of the Emmy nomination list and helps justify the firm’s multibillion-dollar original content investments, which is set to reach $13 billion in 2018.

Shares of NFLX skyrocketed over the last five years as Netflix transitioned from purely an aggregator into an original content giant. Going forward, Netflix’s ability to roll out more hit movies and shows should help it grow amid rising competition from Amazon (AMZN - Free Report) . And let’s not forget that Disney (DIS - Free Report) and Apple (AAPL - Free Report) are set to enter the streaming TV market sooner than later.

Meanwhile, the overall industry continues to expand. Shares of Roku skyrocketed 25% Monday after the streaming firm reported some impressive early Q4 operating results. Plus, Hulu announced Tuesday that its 2018 subscriber totals soared 48% to reach more than 25 million (also read: Buy Roku Stock on the Dip After Q4 Streaming Hours Soar?).

Overview

Netflix is much larger than its rivals and it expects to add 9.4 million subscribers in Q4 to bring its worldwide total to 146.5 million—Netflix added 8.3 million subscribers in Q4 of 2017. Despite its overall strength, Netflix stock plummeted in the second half of 2018, until it appeared to bottom out at $233.88 a share on December 24.

Since then, shares of Netflix have soared 37%. NFLX stock closed regular trading hours Tuesday up 1.56% to $320.27 per share. Luckily for investors, Netflix stock is still down roughly 25% from its 52-week high of $423.21 a share, which clearly seems to set up a solid buying opportunity for those high on NFLX.  

Outlook

Moving on, Netflix last week hired Spencer Neumann as its new CFO to replace long-time CFO David Wells, who announced his plans to step down in August. The new finance chief joins the company from Activision Blizzard (ATVI - Free Report) and will try to strike a balance between spending and returning value to shareholders. Netflix has taken on a ton of long-term debt in recent years as it expands its global reach and original content library to include big-budget films and TV shows with Hollywood stars.

Netflix projects that it will have a negative free cash flow of $3 billion in 2018, with 2019 expected to come in at about the same level. “We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” the firm wrote in its Q3 letter to shareholders.

Looking ahead, Netflix’s Q4 revenues are projected to climb 28% to reach $4.21 billion. NFLX’s revenues jumped 34% last quarter and 40% in both Q1 and Q2. Meanwhile, the firm’s adjusted Q4 earnings are projected to sink 39% from the year-ago period to hit $0.25 a share.

We should note, however, that NFLX’s full-year 2018 earnings are expected to skyrocket 110.4% to hit $2.63 per share. Plus, peeking ahead to fiscal 2019, Netflix’s full-year earnings are projected to soar roughly 55% above our 2018 estimate.

Bottom Line

In the end, investors simply need to ask themselves if they truly imagine Netflix stock not at least returning to its 2018 highs with the streaming entertainment market set to expand for years to come.

Netflix is currently scheduled to release its Q4 financial results on January 17.

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