Netflix Is Being Misunderstood By Investors — Again. Why the 9% Dip Looks More Like an Opportunity Than a Warning

Shares of Netflix (NASDAQ:NFLX | NFLX Price Prediction) dipped after clocking in some pretty respectable quarterly results. While the actual results were decent, investors sensed some hair on the quarter, and with a softer-than-expected guide, perhaps the swift 9% dip, which has since worsened to just over 14% since the latest results dropped, was warranted, especially considering the heated rally off those February lows.

While the technical picture certainly does not look good, with a potential head-and-shoulders top pattern that might entail more pain to come, I do think that the stock is fundamentally sound with good drivers and a now very reasonable price of admission at 29.8 times trailing price-to-earnings (P/E).

The tough post-earnings correction might be an overreaction

Beyond the soft guide, which came in shy of analyst expectations, and Reed Hastings ‘ departure from the board, I do think investors have every reason to have faith in the co-CEOs, who have been calling the shots for quite some time. Indeed, we’re well beyond the Reed Hastings era.

And while the growth path ahead is less certain now that the Warner Bros. Discovery deal is, for sure, not happening, I do think that Netflix still has growth levers to prove the doubters wrong once again. Whether Netflix can charge higher sooner or succumb to the negative momentum, though, remains the big question. At current multiples, I view the stock as a great deal, even if the growth is to get a bit sluggish in the medium term. Why?

In prior pieces, I praised Netflix as a great play for all sorts of economic environments. With a terrific ad-based tier to trade down to when the budget gets tight, Netflix pretty much has its subscribers locked in, provided it continues releasing a solid lineup of content.

With the second season of Beef being met with rave reviews and a slew of other intriguing content coming down the summertime pipeline, I do think Netflix is poised to remain a steady Eddie. And for that reason, a P/E multiple of around 30 times sounds about right. 

Consumers are getting tired of the subscription price hikes. Will Netflix’s pricing power stick?

The big question is how high Netflix could fly if it revs up its growth engine again while adding to its recession-resilient moat. Given Microsoft (NASDAQ:MSFT) Xbox Game Pass, often referred to as the Netflix of gaming, backtracked on pricing under new boss Ashi Sharma, I do think we’re entering an era where big price hikes don’t come so easily anymore.

While the Game Pass rollback seems like a better deal, it is worth noting that new Call of Duty titles (arguably the biggest draw of Game Pass) are no longer being included, at least not until around a year later. As such, the price reduction is more of a trade-off than a gift. And for some, it’s a move that doesn’t quite enhance the value proposition by enough.

At the end of the day, Game Pass needs to compete not only with individual titles but with Netflix, social media, and other entertainment platforms. While I do believe Netflix has a far stronger pricing power versus Game Pass, especially as it looks to make a deeper dive into gaming, the streamer must be careful not to run too far ahead of its skis with the price increases.

Netflix has money to spend. Gaming is an arena that could level up its growth

Eventually, consumers will get sick of the price hikes and start speaking with their wallets as appeared to be the case with Game Pass. Removing content in response to price rollbacks isn’t guaranteed to bring subscribers back. Either way, Netflix has a long growth runway in live sports as well as the ability to make a mark in gaming. Thus far, Netflix’s gaming has been a nice-to-have sweetener, with casual mobile games and TV party games that are easy to pick up.

Personally, I think there’s disruptive potential if Netflix were to use the cash it would have spent on Warner Bros. Discovery content on gaming partnerships or maybe even a studio. For the price of Warner Bros. Discovery, Netflix could punch its ticket to Take-Two Interactive (NASDAQ:TTWO) and expand its gaming reach in a very disruptive way. 

Xbox Game Pass used to be the best deal in town. After its big price hike, it became all too easy to cancel. Now that it’s rolled back prices while excluding the latest Call of Duty titles, I’m not so sure if all of those who’ve canceled will treat the “trade-off” as a big enough win. Time will tell. Either way, I think there’s a massive opportunity for Netflix to dive into gaming as game streaming looks to become the next big frontier.