Netflix, Inc. shares fell by as much as 8 percent on Thursday amid a broad decline in media stocks. Uncertainty surrounding the media space continued to hurt stocks of The Walt Disney Co. and Time Warner Inc. Sentiment turned even more negative after Bernstein lowered both these stocks to “market perform” from “outperform.” Disney tumbled more than 6 percent, while Time Warner was down by more than 5 percent.
Thursday’s drop comes just weeks after a massive sell-off in prominent media stocks. Quarterly earnings from these firms showed an alarming rise in people moving away from traditional television. The sector is undergoing a shift, and firms are simply just not prepared to embrace the fast changing user preferences. As such, analysts fear that TV advertising will enter into a sustained phase of structural decline due to this mass migration to platforms with lesser ads.
Netflix Entering a Buy Zone
The decline in Netflix, Inc. was a classic case of irrational crowd behavior. Just because traditional media is struggling doesn’t justify the pounding the stock received yesterday.
In fact, BTIG analyst Rich Greenfield believes the recent drop provides an excellent opportunity to enter into Netflix. Of course, the stock is not cheap after soaring more than 120 percent since the start of the year.
But market’s perception of fair value is ever changing. Something that was expensive a month ago may not seem so expensive amidst the mayhem that has hit the sector.
The cable un-bundling started quite some time ago; and given the supporting evidence, may have hit an inflection point now. Netflix will be a direct beneficiary, and investors need to ignore the high valuations. Look at Netflix, Inc. ’s stock on a “sum of the parts basis,” and stay put for at least a couple of years.
Subscribers Increasing Steadily
Netflix, Inc. margins are improving, and the firm is expected to add more subscribers year-over-year. Last month, Netflix said it added a record 3.27 million net subscribers. That was well above the consensus analysts’ estimate of 2.46 million additions.
Netflix, Inc. ’s goal is to make the service globally available by the end of 2016. That diversification should minimize domestic risks. However, the management is not solely relying on expansion to boost growth. To stay above competition, the firm is also heavily investing in original content. The last few months has seen the launch of a number of critically acclaimed series.
The media sector has been in a steady decline in recent years. Users are shunning costly bundled packages in favor of cord-cutting options. Netflix, Inc. is the leader of the cord cutting pack. As more and more subscribers enter into the system, the stock should provide superior returns from current levels.