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Netflix Stock: Bill Ackman Makes A Great Bullish Argument

Netflix investors are in good company. Pershing Square’s Bill Ackman has built a sizable position in the past few days. This is how his buy-the-dip move could make sense.

Even if for a brief moment, Netflix stock  (NFLX) - Get Netflix, Inc. Report has finally caught a break. After tumbling 48% from the November 2021 peak of $692 per share, the stock climbed 4% in after-hours trading on January 26, despite the S&P 500 futures heading lower by nearly 1%.

The reason: famed investor Bill Ackman disclosed ownership of 3.1 million shares of Netflix by his investment firm Pershing Square. The position was set up in the last few days, following ill-received Q4 earnings results.

While catching price bottoms has traditionally been very tough, at least Bill Ackman makes good business fundamental arguments about owning shares of the video streaming giant. Could this be a turnaround moment for Netflix stock?

Figure 1: Netflix Stock: Bill Ackman Makes A Great Bullish Argument

Figure 1: Netflix Stock: Bill Ackman Makes A Great Bullish Argument

(Read more from the MavenFlix: Netflix Stock: Why Wall Street Still Likes It)

Bill Ackman’s bull thesis on NFLX

Bill Ackman’s investment in Netflix was explained in a brief, three-page letter to investors. The decision to pull the trigger and become a top 20 investor in the streaming firm came after “an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance”.

But of course, only because a stock has been sold aggressively in the market does not mean that it is worth owning. Support for Mr. Ackman’s investment also included the following:

  • Netflix is at the center of the secular transition from traditional TV consumption to streaming entertainment, also known to many as the “cord-cutting” phenomenon.
  • The revenue model is subscription-based, which offers top-line stability and predictability, and the growth opportunities are many.
  • The company is competent at producing high-quality content that can be leveraged and scaled globally.
  • Economies of scale should allow for margin expansion, while growth can be funded through Netflix’s robust cash flow.

MavenFlix’s take

We think that Bill Ackman and his Pershing Square team make great points about owning Netflix stock. We also believe that, within streaming, it is hard to argue against Netflix’s market dominance and growth potential.

To be fair, a solid counter-argument could also be made about slowing growth rates, especially in the more profitable developed markets. Also, rich content costs could continue to serve as headwinds to profitability — although much of it has been offset by growth and scale.

The question that remains is whether NFLX is the right stock at the right price. According to Alpha Spread, the 2022 P/E multiple of 31 times is substantially lower than what it has been historically — see chart below. Should earnings growth start to rebound from flat in 2022 (projected), current valuations will eventually prove to be attractive.

Figure 2: Netflix's P/E history.

Figure 2: Netflix's P/E history.

On the other hand, this is an environment of rising rates and aversion to growth stocks. So, is Netflix stock discounted enough today to produce compelling returns in the long term? Or could the share price bottom be much lower than the current $370, as the knife keeps falling?

You can help to answer this question by participating in the poll below.

Twitter speaks

Bill Ackman’s Pershing Square has bought 3.1 million shares of Netflix stock at or below $400 apiece. Do you think this was a good move?

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

Alpha Spread’s user-friendly platform allows you to estimate a stock’s fair value –through valuation multiples, discounted cash flow, and more. I believe that the service is a must for anyone looking to own the right stock at the right price. Check out alphaspread.com and get started with a 7-day free trial.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)