Even though Netflix, Inc. ‘s share prices plummeted on Monday along with the rest of U.S. equities, the firm’s prospects remain bright. On Tuesday traders started to buy back into the stock and it was up 6 percent at time of writing. Here are 3 very compelling reasons to not sell the stock right now.
The Business Model is Intact
The uncertainty in Chinese economy will definitely have a ripple effect. The U.S. maybe be somewhat shielded, but consumer confidence will surely take a hit. The urge to spend on movies and television shows will decline. Inexpensive entertainment will be preferred. As ironic as it sounds, consumer caution will actually make Netflix, Inc. ’s cheaper subscription offerings more valuable.
Even before the weakness in the equity markets materialized, Netflix was luring away customers from top U.S. cable firms. The reasonable pricing model, and a savvy mix of popular and original programming, led to a rapid rise in subscription growth. That trend will definitely not change because of some sudden, China-driven sell-off in the equity markets.
Netflix Price Floor May Not Be Too Far Off
Netflix, Inc. has never traded in the reasonable valuation band. That’s largely because the rapid pace of revenue growth has attracted the big crowd of short-term momentum traders, looking to make a few quick bucks.
Big sell-offs and subsequent jumps to new highs, has been the norm in Netflix’s stock ever since it caught the fancy of Wall Street. Just look at how the buyers stepped in mid-way to arrest Monday’s slide.
Netflix was up as much as 160 percent year-to-date at the start of August before it began one of its regular corrective phases. The stock was down close to 18 percent by early afternoon on Monday, when investors sensing the opportunity, began buying into the stock.
With a large number of buyers sitting on the sidelines, the price floor can’t be too far away. And given the fact that even after the splendid recovery yesterday, Netflix, Inc. ‘s stock is still about 15 percent below its last peak, gradually entering into the stock may seem a great call in hind-sight.
This is Not 2008 Redux
The economy was in dire straits in 2008, and a full-blown depression was only averted because of the aggressive government intervention. The situation today is nowhere close to as bad as it was back then.
The country’s biggest banks are in much better shape. Many reforms have been implemented that have made the banking system in particular and the economy in general, far less prone to a meltdown.
Economists at Citigroup state that just 5 of the 16 indicators on their “bear market checklist” are flashing red. Just before the start of the 2008 crash, 12 of those indicators were in red. “This suggests that a sustained bear market is unlikely,” Citi concludes.