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Key Points
Netflix operates the world's largest streaming platform for movies and television shows.
The company recently reported mixed operating results, adding to recent negative sentiment.
Nevertheless, it appears Netflix has only scratched the surface of its long-term opportunity.
Netflix (NASDAQ: NFLX) operates the world's largest streaming service for movies and television shows. On July 16, the company reported a mixed set of operating results for the second quarter, with its earnings per share beating Wall Street's expectations, but its revenue and forward guidance falling short.
Netflix stock sank 7% after the release of its second-quarter report, adding to a 48% decline from last year's record high. An increasingly competitive landscape, combined with the recent departure of co-founder Reed Hastings (who was serving as chairman of the board) are among the other factors weighing on investor sentiment.
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However, read on to find out why I think the recent pessimism has created a great long-term buying opportunity.
Netflix continues to dominate the streaming industry
Netflix has over 325 million paying subscribers, so it's towering over its nearest rivals like Amazon Prime and Warner Bros. Discovery (the owner of Discovery+ and HBO Max), which have 200 million and 140 million members, respectively. Staying ahead of the competition requires innovation, an attractive content slate, and flexible membership options.
In late 2022, Netflix introduced a new subscription tier at an affordable price point, supported by advertising. It costs just $8.99 per month, whereas the ad-free Standard and Premium plans cost $19.99 per month and $26.99 per month, respectively. However, ad-tier members have the potential to become more valuable over time, because Netflix can charge businesses more money for advertising slots as this user base grows.
Ad slots also command a premium during live programming, so Netflix is investing heavily in sports content from across the National Football League (NFL) and Major League Baseball (MLB), boxing, and even World Wrestling Entertainment (WWE). Plus, the company says 6 of the 10 biggest new-member sign-up days over the last five years have come from live events, which also give the subscriber base a huge boost.
But despite all of its efforts, Netflix's second-quarter operating results mostly missed Wall Street's expectations. The company generated $12.56 billion in revenue, slightly below analysts' $12.59 billion estimate. Management also narrowed its revenue guidance range for 2026; it was previously $50.7 billion to $51.7 billion, and now it's $51 billion to $51.4 billion. The midpoint of both ranges is $51.2 billion, so, despite disappointing some analysts, I think it simply means management now has more clarity about where revenue might land.
Advertising revenue remains on track to be a real bright spot in 2026. Netflix expects it to come in at $3 billion, which would be double last year's result.
Netflix stock is cheap right now
One area in which Netflix topped Wall Street's expectations during the second quarter was at the bottom line. The company reported earnings of $0.80 per share, beating the analysts' average estimate of $0.79 per share. Earnings typically drive stock prices over the long term, so this is positive.
Based on Netflix's trailing-12-month earnings of $3.18 per share, its stock is trading at a price-to-earnings (P/E) ratio of just 21.7, a steep discount to its five-year average of 40.6. It also makes Netflix considerably cheaper than the Nasdaq-100, which has a P/E ratio of 33.4, so you could say the streaming giant is undervalued compared to a basket of its big-tech peers.
Netflix stock would have to soar by 54% in the near term just to match the P/E ratio of the Nasdaq-100, which isn't necessarily unrealistic, given that it spent most of the last five years with a P/E above 30.
While it's true that Netflix's revenue and earnings growth are slowing, that is a typical trait of practically every company approaching maturity. Nevertheless, Chief Financial Officer Spencer Neumann believes Netflix has captured only around 7% of its estimated $670 billion global revenue market, so there could be plenty of long-term growth ahead.
Given Netflix's solid execution and the sheer size of its global opportunity, I don't think its stock should be trading at a discount to the broader market. As a result, the recent dip presents investors with an intriguing opportunity.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
